| If you’re new to the world of investment | | | | about investment strategies, and they often write |
| banking, you’re probably lost in the | | | | many research reports detailing their findings. |
| complexity of the finance industry. The following | | | | The asset management team manages money. |
| primer explains the nuts and bolts of investment | | | | Asset managers generally manage portfolios for |
| banks and what they’re all about. | | | | wealthy clients, pension and mutual funds, and |
| In basic terms, investment banks transfer money | | | | insurance companies. They may invest in stocks, |
| and risk. They move money from the people | | | | bonds, or any other form of asset. Often, special |
| who have it to those who need it. They move | | | | groups of asset managers concentrate on private |
| risk from people who do not want to deal with it | | | | equity or venture capital, where they invest in |
| to those who are comfortable taking it on. The | | | | high risk startups that carry potentially high |
| ways in which this is done depends on the banking | | | | returns. Asset managers purchase the services of |
| division you’re working with. | | | | the sales and trading group in order to buy and |
| The majority of investment banks have four | | | | sell securities for their portfolios. They likewise |
| main divisions: Sales and Trading, Research, Asset | | | | pay the researchers to learn about which |
| Management, and Investment Banking. Below is a | | | | securities they should include. |
| summary of the main tasks each division | | | | Practically every other function falls within the |
| performs. | | | | investment banking category. One major role of |
| The sales and trading division is the one that most | | | | this group is to underwrite securities such as |
| likely comes to mind when you think of | | | | stocks or bonds. Companies seeking money to |
| investment banking. This division buys and sells | | | | invest in capital either borrow it from the public |
| securities for clients, including equity (stocks), | | | | (issue bonds) or sell portions of the company |
| fixed income (bonds), and commodities and | | | | (issue stocks, known as IPO). Whichever method |
| currencies (oil, ore, electricity, gold). Most of the | | | | they choose, they are assisted by investment |
| transactions involve deals concerning thousands of | | | | banks, which take them through the process, |
| shares and millions of dollars. Clients are generally | | | | from the initial government filings to the |
| major financial entities, such as money and | | | | marketing materials and selling the stocks and |
| pension fund managers, foreign government | | | | bonds to the public. Banks provide local |
| bodies, insurance companies, and commercial | | | | governments such assistance by issuing municipal |
| banks. Those who work in this division either | | | | bonds. An increasingly common asset is the |
| focus on sales, taking client orders for securities, | | | | securitized bond, particularly because it offers |
| or trading, in which they link up buyers and sellers | | | | reduced risk. Securitized bonds are unique in that |
| by finding mutually agreeable prices. Traders also | | | | instead of representing ownership of a loan to a |
| ensure their positions are hedged by making sure | | | | company, they may instead represent rights to |
| they do not lose money regardless of market | | | | the proceeds from a company’s income. |
| conditions. To take a simple example, traders | | | | The investment banking division is also heavily |
| might buy shares of electric generators to | | | | involved in providing advisory services, i.e., helping |
| counteract shares they hold in electricity. If the | | | | companies with their finances. These services are |
| price of electricity drops, the trader does not lose | | | | typically required in mergers and acquisitions |
| money because lower electricity prices make | | | | (M&A), when companies are seeking to buy |
| generators more profitable, and therefore their | | | | others. In such situations, an investment bank |
| price rises in reaction. | | | | assists in arranging the financing for the |
| Professionals in the research division do the work | | | | transaction and directing the unification. |
| of the analysts you see talking about their | | | | To summarize, investment banks shift funds. |
| expectations for particular companies when you | | | | They likewise move risk from those who have |
| watch the news. Their role is to advise the | | | | money to take chances with to those who need |
| banks’ clients, as well as the traders, on | | | | it. The banks handle everything from the |
| these matters. They gather information by looking | | | | company trying to build a factory, paying extra |
| at the working of the companies they cover in | | | | for risk coverage, to the mutual fund manager |
| depth, including reading earnings reports, visiting | | | | investing money in a startup venture. Investment |
| factories, and reading foreign newspapers. They | | | | banks are one stop shops for those seeking |
| are accessible to their clients or other company | | | | capital for projects and those looking to loan their |
| employees around the clock to answer questions | | | | money out. |