Isn’t this a question that runs through most of our heads once we watch all the numerous Hollywood movies and TV shows right? They certainly lead the high life with flashy cars, trophy wives and incredible wealth we can all dream about and envy.
To the average layman, bankers are all the same. Nevertheless, you should know investment bankers don’t deal with retail banking activities. Retail banks offer services directly to consumers such as savings accounts and personal and home loans. These services are mostly simple and straightforward, though some can be more complex and exotic. Investment banks act as a go-between in transactions involving large corporations among other functions, such as the following:
Suppose a government wants to raise funds to build large infrastructure projects. It would not be able to borrow from local banks as this would increase interest rates for the average borrower. Bankers are much willing to lend to governments as opposed to ordinary citizens, quid pro quo kind of thing. So a government would have to look for financing elsewhere. An investment bank comes in at this point. They will arrange for a bond to raise funds. Pricing of the bond will also fall to them. An investment bank will have a large number of international investors. The bond would allow them an opportunity to lend to a government. In the end, the investment bank will have charged some money for the undertaking and the government will have funds for its new projects.
Companies will require injection of revenue from time to time. It is mostly used to fuel growth, introduce new products into the market among other purposes. A company may decide that raising money through the normal channels like banks is too costly for them. As a measure, they will choose to raise funds through an initial public offering (IPO) of their shares. Investment bankers will handle the deal by buying up the shares first from the company. They will then sell the shares to the public at a higher price than they bought them for. It is a high stake business since they have to make sure the shares are worth gambling.
Mergers & acquisitions
At some point, you have heard of a merger or takeover happening right? The intricacies of the deal are hard to understand for you. In a nutshell, a larger or same size company will see value in buying up or joining the competition. What they have in the end is a super corporation with a larger market share in their particular market space. Investment bankers will act as the intermediary in this kind of transactions. They provide information to both parties on business valuation, transactions and pricing operations and negotiations. They will make money from the information offered to the parties.
Initial price offerings are a great way of raising revenue. However, they take up too much time. For a company that requires the income as soon as possible, it is not a viable option for them. Investment bankers will instead buy up the stock and sell it to institutional investors such as retirement funds or insurance companies. The private placement is also easier to negotiate through since there are fewer regulations to contend with compared to an IPO.
The work investment bankers do is not as glittery as their lives it seems. Nonetheless, it is where they earn their big bucks.