Know more about the many facets of investment banking and some of the investing banking myths most investors know nothing about.
Investment banking is the business of investment banks. The investment bank serves as an intermediary between companies that are looking to issue securities and investors who are looking for investment opportunities in either bonds or stocks.
This means, the investment bank acts as a broker and helps invest money from investors into securities like company's bond issues or corporate stock. Investment banks also help businesses with mergers and acquisitions (M&A), i.e., providing investment advice to help merge two companies together by trying to find common ground where both of the companies can gain from merging them together instead of doing separate ventures. This often leads to higher profits than just one merged company on its own, hence, they don't need to worry about losing out against each other.
What Do Investment Banks Offer?
Some investment banks may offer advisory services for specific industries and markets. For instance, it can be an investment house that deals with the entire Asian market or one that looks to help fund companies who are looking to build power plants in Europe.
Investment banking helps businesses with securities (selling stocks or bonds), trading (buying and selling stocks) and investment advice to clients regarding investing their money into either a venture like starting up a new business or using their assets for some other endeavor which will hopefully bring them more wealth/money in the long run.
It's hard to say what exactly goes on behind closed doors of an investment bank since they work with investment advice and keeping secrets is a part of investment banking, but I'm sure it goes beyond just taking money from investors to give to investment houses.
Why are People Interested in Investment Banking?
People are interested in investment banking because it has become a glamorous occupation ever since investment banks started to get mentioned in the mainstream media and especially after investment bank start-ups like Goldman Sachs became household names, but investment bankers aren't just investment bankers.
There is huge competition for an internship at an investment bank, but not every successful intern will be hired on after the summer ends. When they do hire, investment bankers usually start out as analysts or associates and work their way up from there.
Associates – Associates are basically interns that have graduated from being an analyst to investment banker. They are entry-level employees who work in investment banking and will usually become vice presidents once they've been long enough with the investment bank, earned the trust of their bosses and have proven themselves worthy of taking on challenging tasks.
Analyst – The analyst's job essentially entails analyzing data provided by clients (usually prospects who are looking for investment advice) and figuring out what deals they should make with either other businesses or investors looking to buy securities from them.
The investment banker job is extremely competitive and hard to get. This is why people are interested in investment banking, because it's one of those jobs that requires a lot of skill yet offers quite a bit financial reward because investment bankers are basically professionals at making money operate effectively together after working hard for so long. They eventually start enjoying what they do since money is not an issue anymore, relieving them stress which means that investment bankers tend to enjoy life more than most other professions.
Being an investment banker means having one of those jobs that people dream of (if not the most) because it makes everything else seem frivolous or less important. Of course, investment bankers work hard anyway, but they have to, otherwise they won't be able to offer investment advice, stocks and other securities for their clients as effectively since investment bankers are constantly learning about new investment methods and what types of assets will do well in the long run.
The investment banker job is a lot harder than most people think and if you're going into investment banking expecting to make tons of money right away then you're probably going to be disappointed with how difficult it is. It's prestigious and requires years upon years of training before investment bankers really start good at their jobs, but investment bankers still manage to make a lot of money.
Does Investment Banking Really Cause the Downfall of Investors?
To answer that briefly: No investment advice will lead directly to someone losing all of their money because investment bankers don't just provide investment advice, they work with clients and help them analyze the data provided by investment bankers as well as test out new investment strategies so that investment bankers can be sure they'll actually help their clients making more investments in the long run.
In addition, even if an investor does end up losing everything due to bad investment advice, it's not necessarily an investment banker's fault since there would have been something wrong with how he managed his relationship with his client or how he analyzed the investment data provided to him in the first place. It's not investment bankers' jobs to tell their clients what investments will work out or not. Well, that's something investment bankers leave up to the investors themselves.
Very few investment banker really look like what people think investment bankers should look like, especially investment banker stereotypes brought about by Hollywood movies, but even investment bank stereotypes are based on how people tend to act and act mostly because they have something to gain from acting a certain way.
Of course, investment banking is filled with ambitious men who want power and money just as much as any man does (if not more), but there are women investment bankers too and many of them work harder than most of the male investment bankers out there, since female bankers are expected to work hard, they outperform male investment bankers and still look good doing it.
The investment banker's job requires dedication and investment bankers are men and women who have dedicated their lives to learning everything about investment banking, creating a perfect balance between making money, which is basically what investment banking is all about, and having time for family as well.
Investment Banking Myths That Some Investors Don’t Know
Investment bankers don't get paid enough.
This statement sounds ridiculous because investment bankers are some of the highest paid professionals out there, but a lot of people don't know this since a lot of investment bankers live rather expensive lifestyles that they wouldn't be able to do if they weren't making so much money in the first place.
Investment bankers also have to spend most of their time working on deals for investment banks to earn money, which means investment bankers don't have a lot of time left over for vacationing and other expensive hobbies. However, investment banking is prestigious and investment bankers get recognition for the work they do, which investment bankers sometimes care more about than money, even though investment banking does make it possible to live a certain lifestyle most people wouldn't be able to afford otherwise.
Investment bankers aren't responsible towards their clients or companies they work with.
Investment banking is all about advising clients on what investments will be successful in the long run, but investment bankers are paid by investment banks not by customers directly so investing banker don't usually take into account how much potential risk an investment has if it's already been approved by client management their investment bank is working with.
That investment banker may know better than the investment bankers who work for that investment bank and clients are expected to trust investment bankers or the investment banks they represent, but investment bankers don't get paid unless their investment bank makes money off of it. For riskier investments, investment banks hire special “risk” or “credit” investment bankers who have more experience in this area, which means these investment bankers have to spend more time working on that deal before moving onto others.
Investment banking isn't a real career because it's too competitive to be one.
It's true, investment banking takes a lot of hard work and dedication of people to succeed at it especially senior level positions; but there's also something called networking, which investment bankers use to find jobs just like anyone else does. Investing banking isn't a complete meritocracy, but there are some investment banks that do hire investment bankers with no prior investment banking experience to work at their investment bank because they want to build up that investment bank, or just need more people on staff in general for new investment opportunities.
Investments are done through investment banks by companies of all sizes and levels; small businesses, medium-sized business or even the biggest corporations in the world and these corporations have already established networks that can help them find any investment banker they might need for their deals. Some of them might not be able to afford hiring an expensive senior level investment bank as opposed to a junior level one, but if you're knowledgeable about investment banking you can find an investment bank that's willing to hire investment bankers who don't have any prior experience in investment banking although it does take a lot of networking.
Investment bankers are always trying to get rich off of other people's money.
Investment bankers might try and make as much money for investment banks as possible, but they're also responsible for handling all transactions involved in the long run. Investment banking has a reputation of being cutthroat since everyone is trying to win a deal or convince clients of investment opportunities, but what happens after the deal is closed? Companies need businesses like investment banks to manage their investments and do well with them and investment bankers help companies invest their own assets so they get the most out those investments to help the investment bank make money off of those investment.
There are bad investment bankers who don't have any respect for their clients or anyone else involved in investment banking, but investment banks also find ways to keep investment bankers they hire in check through hiring and promotion policies, which makes it hard for investment bankers who do shady things to succeed at an investment bank long term. Investment bankers aren't responsible for you losing your investment or savings because of a sometimes risky investments either. If a company makes too many poor investing decisions that result in losses then investors might lose confidence and decide not invest anymore. This is why there's supposed to be analysts associated with every investment bank where they study companies financials will also review deals made by investment banks just in case investment banks running a company's investment portfolio are making poor investment decisions.
Investment bankers are all greedy people who only care about money.
Not every investment banker is evil, and not everyone in investment banking loves money, just like any other job there are good investment bankers and bad investment bankers. Some investment bankers treat their jobs like a business where they have to work hard to succeed while others see investment banking as a fast way to make money using shady deals but it takes more than one person for investment banks to succeed.
You need good investment bankers working with clients who can find good investments that fit the client's objectives instead of finding risky or shady opportunities for them so both parties will win in the end. Investment bankers aren't always intelligent people who throw around investment lingo; investment bankers are just like everyone else: some are intelligent while others aren't, and they might be people you would expect investment bankers to be – investment banking isn't an industry where only really smart people work in it.
Investment banks have too much power because of the control they have over investment opportunities.
Investment banks don't always win a deal from clients who invest their money with them because investment banks always have competition from other investment banks, so if investment banks screw up big time then companies can take their investments elsewhere instead of losing everything since there will be many opportunities for the company to invest elsewhere.
If investment banking was such a bad job then why do so many graduate wanting to get into it despite not being able to get a job there right away? People taking the risks with investment banking jobs know what they're getting into and they understand that working at an investment bank is a job just like any other but most of them think it's worth the risk because of all the potential rewards.
Investment bankers always try to get rich off of other people's money by doing shady deals and making bad investments.
Investment banks are responsible for managing clients' assets and finding ways for those companies to make more profit from their investments, which makes investment banking important – if people didn't have to rely on investment banks then so many companies would go out of business trying find new ways to expand or manage their returns on investments that do well.
While these investment banking myths fit some shoes, still, investment bankers are not worth being generalized. Investment bankers do their best to fulfill their job description while they are with the firm. They are here to help companies raise money, make mergers and acquisitions (M&A), and provide advice on all sorts of financial matters.
Read the Entire Investing Series
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- How to Start Investing While In College
- Stock Investing 101 | 5 Ways Your Mind Plays Tricks on Your Trades
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.