Difference between revisions of "Investment bank"
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| − | + | An '''investment bank''' is a complex financial institution whose main purpose is to raise money by issuing and selling securities in the [[w:primary market|primary market]]. This article provides an overview of such institutions. For the investment banking career path followed by many Columbia students and alumni, see the article about "investment banking". | |
| + | |||
| + | == List of investment banks == | ||
| + | |||
| + | === Bulge bracket === | ||
| + | The very largest investment banks are called "bulge bracket" firms. This group indisputably includes Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, and Morgan Stanley. Depending on who you ask, the group also includes Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, and UBS. The bulge bracket firms are often so large that they are also financial conglomerates. | ||
| + | |||
| + | === Financial conglomerates === | ||
| + | Firms that combine large commercial banking and investment banking operations are known as financial conglomerates. These banks include ABN Amro, Bank of America, BNP Paribas, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Nomura Securities, Royal Bank of Scotland, Grupo Santander, Société Générale, UBS, and Wachovia. | ||
| + | |||
| + | === Other investment banks === | ||
| + | The remaining investment banks are often considerably smaller, and therefore tend to specialize in particular areas of investment banking. If they are sufficiently small, these investment banks are known as "boutiques". A list of the remaining investment banks could become rather lengthy. The main ones include Bain Capital, Jefferies, Lazard (M&A advisory), Lazard Capital Markets, and Rothschild. | ||
| + | |||
| + | === Former investment banks === | ||
| + | Many famous investment banks have been bought over the years, often by a bank on the other side of the Atlantic looking to get a foothold in a new market. (See the [[w:Big Bang (financial markets)|Big Bang]] and the [[w:Wimbledon Effect|Wimbledon Effect]].) Former investment banks you've probably heard of include Barings, DLJ, Drexel Burnham Lambert, First Boston, Kidder Peabody, S. G. Warburg, Salomon Brothers, and Wasserstein Perella. | ||
| + | |||
| + | == Structure == | ||
| + | |||
| + | Investment banks are typically split into several divisions, each of which falls under the "front office", "middle office", or "back office" category. The bulge bracket firms and the financial conglomerates each have all of the following divisions, even if they sometimes use different names. The other investment banks may only have particular front office divisions, such as only an investment banking division (as well as certain middle and back office divisions). | ||
| + | |||
| + | === Front office === | ||
| + | |||
| + | ==== Investment banking ==== | ||
| + | Investment banking is the traditional business of investment banks. Many salespeople, traders, asset managers, private bankers, and other employees of investment banks call themselves investment bankers. However, investment banking is strictly a particular type of business, undertaken by a particular division, Investment Banking. This division is variously known as the Investment Banking Division (IBD), Corporate Finance ("corpfin"), or Mergers & Acquisitions (M&A). Investment bankers advise companies, governments, and other institutions, on any deal they want to perform. Deals are mostly mergers or acquisitions, but can also be privatizations, nationalizations, etc. In a deal, each party will use the services of one or more investment banks. For example, in an acquisition, the acquiring company will use one or more investment banks, and the target company will recruit one or more investment banks. The bankers to the acquiring party will pitch acquisition ideas, calculate how much to pay for the target, prepare documents for the deal, raise the necessary funds, and conduct due diligence. The bankers to the target company will calculate how much money the target should hold out for, coordinate bids, and prepare documents on its side of the deal. Roles differ slightly in acquisitions, etc. | ||
| + | |||
| + | ==== Asset management ==== | ||
| + | Asset management is the professional management of securities and other assets (real estate, etc.) on behalf of investors. Investors may be institutions (insurance companies, pension funds, corporations, etc.), or private investors (individuals or groups of individuals, such as mutual funds). The Asset Management division is sometimes called Investment Management. | ||
| + | |||
| + | ==== Sales & Trading ==== | ||
| + | The Sales & Trading division makes money by trading on the financial markets, which also conveniently creates the markets themselves ("[[w:market making|market making]]"). It is also sometimes called Financial Markets, Capital Markets. Four types of people work in Sales & Trading: | ||
| + | # Salespeople call institutional and private investors to suggest trading ideas, take orders, and communicate these orders to the traders. | ||
| + | # Traders structure, price, and execute these orders; they are the people who actually buy and sell the financial products. | ||
| + | # Structuring specialists will help if the trades are particularly complex, often because they involve derivatives. | ||
| + | # Researchers review companies, write reports about them, and usually attach a "buy", "hold" or "sell" rating to their report. | ||
| + | |||
| + | ==== Private banking ==== | ||
| + | People sometimes consider private banking to be part of investment banking, though it is better classified as a type of commercial banking. | ||
| + | |||
| + | === Middle office === | ||
| + | |||
| + | ==== Risk management ==== | ||
| + | Risk management involves limiting the investment bank's risk, mainly from the activities of the Sales & Trading division. For example, people in the risk management division: | ||
| + | * Analyze the risk taken on by traders, and limit the amount of capital they can play with, in order to limit the potential damage from bad trades. | ||
| + | * Attempt to limit "economic risks". | ||
| + | * Attempt to limit "operational risk", the risk of errors. | ||
| + | |||
| + | === Back office === | ||
| + | |||
| + | ==== Operations ==== | ||
| + | Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. | ||
| + | |||
| + | ==== Technology ==== | ||
| + | Technology or IT involves creating and maintaining in-house software, as well as implementing commercial software and hardware solutions. Technology divisions are rising in importance with the continuing development of electronic trading platforms. | ||
| + | |||
| + | == Further information == | ||
| + | |||
| + | === Books === | ||
| + | * Investment banking: Monkey Business. | ||
| + | * Financial markets: Liar's Poker. | ||
| + | * Private equity: Barbarians at the Gate. | ||
| + | |||
| + | [[Category:Jobs]] | ||
Revision as of 13:37, 11 June 2007
An investment bank is a complex financial institution whose main purpose is to raise money by issuing and selling securities in the primary market. This article provides an overview of such institutions. For the investment banking career path followed by many Columbia students and alumni, see the article about "investment banking".
List of investment banks
Bulge bracket
The very largest investment banks are called "bulge bracket" firms. This group indisputably includes Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, and Morgan Stanley. Depending on who you ask, the group also includes Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, and UBS. The bulge bracket firms are often so large that they are also financial conglomerates.
Financial conglomerates
Firms that combine large commercial banking and investment banking operations are known as financial conglomerates. These banks include ABN Amro, Bank of America, BNP Paribas, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Nomura Securities, Royal Bank of Scotland, Grupo Santander, Société Générale, UBS, and Wachovia.
Other investment banks
The remaining investment banks are often considerably smaller, and therefore tend to specialize in particular areas of investment banking. If they are sufficiently small, these investment banks are known as "boutiques". A list of the remaining investment banks could become rather lengthy. The main ones include Bain Capital, Jefferies, Lazard (M&A advisory), Lazard Capital Markets, and Rothschild.
Former investment banks
Many famous investment banks have been bought over the years, often by a bank on the other side of the Atlantic looking to get a foothold in a new market. (See the Big Bang and the Wimbledon Effect.) Former investment banks you've probably heard of include Barings, DLJ, Drexel Burnham Lambert, First Boston, Kidder Peabody, S. G. Warburg, Salomon Brothers, and Wasserstein Perella.
Structure
Investment banks are typically split into several divisions, each of which falls under the "front office", "middle office", or "back office" category. The bulge bracket firms and the financial conglomerates each have all of the following divisions, even if they sometimes use different names. The other investment banks may only have particular front office divisions, such as only an investment banking division (as well as certain middle and back office divisions).
Front office
Investment banking
Investment banking is the traditional business of investment banks. Many salespeople, traders, asset managers, private bankers, and other employees of investment banks call themselves investment bankers. However, investment banking is strictly a particular type of business, undertaken by a particular division, Investment Banking. This division is variously known as the Investment Banking Division (IBD), Corporate Finance ("corpfin"), or Mergers & Acquisitions (M&A). Investment bankers advise companies, governments, and other institutions, on any deal they want to perform. Deals are mostly mergers or acquisitions, but can also be privatizations, nationalizations, etc. In a deal, each party will use the services of one or more investment banks. For example, in an acquisition, the acquiring company will use one or more investment banks, and the target company will recruit one or more investment banks. The bankers to the acquiring party will pitch acquisition ideas, calculate how much to pay for the target, prepare documents for the deal, raise the necessary funds, and conduct due diligence. The bankers to the target company will calculate how much money the target should hold out for, coordinate bids, and prepare documents on its side of the deal. Roles differ slightly in acquisitions, etc.
Asset management
Asset management is the professional management of securities and other assets (real estate, etc.) on behalf of investors. Investors may be institutions (insurance companies, pension funds, corporations, etc.), or private investors (individuals or groups of individuals, such as mutual funds). The Asset Management division is sometimes called Investment Management.
Sales & Trading
The Sales & Trading division makes money by trading on the financial markets, which also conveniently creates the markets themselves ("market making"). It is also sometimes called Financial Markets, Capital Markets. Four types of people work in Sales & Trading:
- Salespeople call institutional and private investors to suggest trading ideas, take orders, and communicate these orders to the traders.
- Traders structure, price, and execute these orders; they are the people who actually buy and sell the financial products.
- Structuring specialists will help if the trades are particularly complex, often because they involve derivatives.
- Researchers review companies, write reports about them, and usually attach a "buy", "hold" or "sell" rating to their report.
Private banking
People sometimes consider private banking to be part of investment banking, though it is better classified as a type of commercial banking.
Middle office
Risk management
Risk management involves limiting the investment bank's risk, mainly from the activities of the Sales & Trading division. For example, people in the risk management division:
- Analyze the risk taken on by traders, and limit the amount of capital they can play with, in order to limit the potential damage from bad trades.
- Attempt to limit "economic risks".
- Attempt to limit "operational risk", the risk of errors.
Back office
Operations
Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers.
Technology
Technology or IT involves creating and maintaining in-house software, as well as implementing commercial software and hardware solutions. Technology divisions are rising in importance with the continuing development of electronic trading platforms.
Further information
Books
- Investment banking: Monkey Business.
- Financial markets: Liar's Poker.
- Private equity: Barbarians at the Gate.
