Investment Banker: What They Do, Required Skills, and Examples

What Is an Investment Banker?

Investment bankers are financial professionals who advise corporations, as well as governments or other entities. They help these clients raise capital (money) by issuing shares of stock or offering bonds. Investment bankers also can assist clients with financial transactions such acquisitions, mergers, and even the sale of the company.

Investment Banker Role and Responsibilities

Investment bankers facilitate large, complicated financial transactions. These transactions may include structuring an acquisition, merger, or sale for clients. Another responsibility of investment bankers is issuing securities as a means of raising capital. This involves creating detailed documentation for the Securities and Exchange Commission (SEC) necessary for a company to go public.

An investment banker can save a client time and money by identifying the risks associated with a particular project before a company moves forward. In theory, the investment banker is an expert in their field or industry, who has a finger on the pulse of the current investing climate. Businesses and nonprofit institutions often turn to investment bankers for advice on how best to plan their development.

An investment banker also assists with pricing financial instruments and navigating regulatory requirements. When a company holds its initial public offering (IPO), an investment bank will buy all or much of that company’s shares directly, acting as an intermediary. In this case, acting on behalf of the company going public, the investment bank will subsequently sell the company’s shares into the public market, creating immediate liquidity.

An investment bank stands to make a profit in this scenario, generally pricing its shares at a markup. While experienced analysts at the investment bank use their expertise to price the stock accurately, an investment banker can lose money on the deal if they have overvalued the shares.

An Example of Investment Banking and an IPO

When a company works with an investment banker for the IPO, the investment banker's firm buys the shares from the client at an agreed-upon price, based on how the firm's analysts value the company and how much they expect shares of the stock to be worth. Then, on the day of the IPO, the firm sells those shares to the public at a higher price than it paid to make a profit.

As an example, suppose that Pete’s Paints Co. wants to go public. Pete, the owner, gets in touch with Catherine, a prominent investment banker. Pete and Catherine strike a deal in which Catherine (on behalf of her firm) agrees to buy 100,000 shares of Pete’s Paints for the company’s IPO at the price of $24 per share, based on her analyst team's recommendations. The investment bank pays $2.4 million for the 100,000 shares.

After filing the appropriate paperwork, such as SEC Form S-1, and setting the IPO's date and time, Catherine and her team offer the stock into the open market at $26 per share.

If the market supports the $26 per share price, Catherine's firm would make $2.6 million from the IPO, for a profit of $200,000. However, if public demand is weak, the firm might not be able to sell all the shares at this price. Catherine and her team would be forced to reduce the price to sell the rest of the holdings. In this case, the firm could incur a loss on the sale, but Pete's Paints Co. would still receive $2.4 million.

Required Skills for Investment Bankers

The investment banking field is popular because investment bankers are typically well paid. However, these positions require specific skills, such as:

• Strong numeracy
• Strong verbal and written communication skills
• Training and experience in the investment/financial world
• Expert knowledge about a client's industry
• The capacity to work long hours, particularly early in a career

Investment bankers must abide by their firm's stipulated code of conduct and ethics. Because of the sensitive nature of the information they receive, they must typically sign a confidentiality agreement for each client. Moreover, there is potential for conflict of interest if the advisory and trading divisions of investment banks interact.

A hierarchy of positions typically exists in investment banking. These positions usually go from analyst (from junior to senior), associate, vice president, senior vice president, and then managing director.

The Bottom Line

Investment bankers are financial advisors who work with corporations, governments, and other large entities. They assist clients with raising capital, often through stock offerings or floating a bond issue. They can also assist with major financial transactions such as mergers, acquisitions, or the sale of a company.

Investment bankers usually have an MBA or an advanced degree in mathematics, usually from a highly-ranked university. They work for a financial institution and are highly compensated, with annual salaries (plus bonuses) that are typically worth six figures.