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investment banking

Investment banking is a division of banking focused on raising capital for companies, governments and other entities. Investment banks, which are typically private companies, may underwrite debt and equity securities, assist with mergers and acquisitions, provide  financial advisory services and offer IPO (initial public offering) support when companies go public.

Organizations typically turn to investment bankers when they’re facing a complex financial transaction, like issuing debt or underwriting securities. If you haven’t heard much about investment bankers aside from their staggering six-figure salaries, here’s what you need to know.

How Do Investment Banks Work?

Goldman Sachs, Deutsche Bank and Barclays are some of the world’s top investment banks. While you’ve probably heard of them at some point, you may not know what they do. Investment banks are a type of bank that work primarily in high finance, helping companies access capital markets, like the stock market or the bond market. Investment banks carry out complex financial services and transactions on their clients’ behalf, acting as underwriters, intermediaries and financial advisors. So, for instance, if a government wants to finance the construction of a highway, it might turn to an investment bank to issue bonds to raise capital.

Essentially, investment banks are the middlemen between a company and public investors. Most investment banks engage in some combination of the below:

  • Raising capital by investing in securities or issue new stocks during an IPO
  • Raising debt capital to help a company expand by finding investors for corporate bonds
  • Facilitating mergers and corporate restructuring
  • Proprietary trading, investing and trading the banks’ own money for their private account

What Do Investment Bankers Do?

investment banking

Investment bankers’ high salaries are often earned after long hours, high stress and incredibly repetitive work. Essentially, investment bankers are corporate financial advisors with an expertise in securities. They must understand government regulations and stay on top of the current investment climate. They assign an estimated cost to instruments and offerings using sophisticated financial models.

Investment bankers identify potential risks, project possible earnings and prepare documentation for the U.S. Securities and Exchange Commission (SEC) on behalf of their clients. At the lower rungs, that means lots of research and Excel work. As you get climb the ladder, you take on a more client-facing role, meeting with clients and pitching business to their network of investors.

How Do Investment Banks Make Money?

Investment banks’ operations can be broken down by the main offerings they sell: advice, financing, trading and research. They make money by selling these services to its customers, which include companies, governments and investment funds.

The banks earn fees and commissions from the work they do on behalf of clients. They make 100% of their propriety trading profits.

How Much Do Investment Bankers Make? 

investment banking

Everyone has heard seemingly improbable tales of college grads earning six-figure salaries in their first year out of business school. Maybe those stories were compelling enough to lure you into finance or accounting careers. As it turns out, these opportunities are out there if you choose a career in investment banking.

According to networking site LinkedIn, investment-banking analysts in the U.S. make an average annual salary of $85,000. Once those analysts become associates, which usually happens three years into their career, their salaries jump to $150,000. And that’s just base salary: As a 2016 study from LinkedIn shows, bonuses are plentiful in investment banking. Though the average American professional makes 7.6% of their salary as bonus, investment bankers make upwards of 60% of their salary in their bonuses.

To be an investment banker, all you’ll need is a bachelor’s degree. However, many investment bankers attend business school. Investment bankers start out as analysts and then progress to being associates. After that, they can move up to become a vice president, a director and then a managing director.

Investment Banking Regulations

Investment banking has repeatedly come under scrutiny, with many government figures and experts pushing for tougher regulations. Notably, investment banks have caught blame for financial disasters including the 1929 stock market crash and the 2008 financial crisis.

Historically, investment banking regulations have long been a topic of debate. Back in 1933, Congress passed the Glass-Steagall Act of 1933, which required that investment and commercial banks operate separately and assigned unique roles for each. The act was intended to dissolve connections that many believed caused the 1929 stock market crash. But in 1999, after years of weakening, the act was repealed.

More than a decade later, in July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Part of that act included the Volcker Rule, which re-instituted some parts of Glass-Steagall to prevent banks from making certain speculative investments that may have contributed to the 2008 financial crisis.

Nowadays, Republicans and Democrats alike agree that there should be a “21st Century Glass-Steagall” bill. However, they still need to figure out what that would look like. As of now, big investment banks can also serve individual customers through a retail division, which opens up the possibility of potential conflicts of interest.

Tips for Starting to Invest

  • If you’re not well-versed in investing like investment bankers are, consider finding a financial advisor to help you. An experienced professional can help you determine the right investment strategy for your financial situation and goals.
  • Start investing sooner rather than later. SmartAsset’s investment calculator demonstrates how your investments can grow over time.
  • Carefully consider how much risk you are comfortable with taking. While uncertainty can be unnerving, a diverse mix of stocks and mutual funds will give you a far better chance at seeing significant financial growth than bonds or traditional savings accounts. SmartAsset’s asset allocation calculator can help you figure out what allocation is best for your risk tolerance.

Photo credit: ©iStock.com/g-stockstudio, ©iStock.com/Pinkypills, ©iStock.com/Ismailciydem

Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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