Investment Banking

Background

It’s an investment banker’s job to keep their finger on the pulse of the financial markets and help organize large financial transactions.

Investment banks raise capital for companies via transactions like IPOs (the sale of a company’s equity/shares) or debt financing and advise companies in mergers and acquisitions (buying and selling companies). Find more specifics here.

What Investment Bankers Do

Companies hire investment bankers to help organize huge and complicated financial transactions for their clients, including debt financing, initial public offerings, mergers, and acquisitions. The clients are typically large institutions such as corporations and governments. 

Another way to think of an investment banker’s job is that they raise money for these institutions. Helping issue new securities (like shares of stock) for a corporation is one way to do that. 

Companies looking to IPO often reach out to multiple investment banks to help figure out how to price their shares (more on how this works here). 

Some of that happens via the book building process, where bankers help determine an IPO’s price per share. Investment bankers “build a book” by asking fund managers and other institutional investors to submit bids for the number of shares they want and outline what they’d be willing to pay for them. Book building is widely considered the most efficient way to price securities.

Investment banks make money via transaction fees—meaning they take a cut of transactions such as IPOs and acquisitions. The fee for IPOs, for example, is typically about 7%—so if a company IPOs for $100M, the investment bank would receive $7M. There are different transaction fee norms for other types of transactions, but they all add up: Global investment banking revenue was roughly $100B in 2023.

The Glass-Steagall Act

Because of something called the “Glass-Steagall Act,” there was a 66-year period in history where investment banks and commercial banks (the banks where you deposit your paycheck) were separated by law.

Before 1933, investment banks and commercial banks were just one thing: banks. But, the Great Depression sowed distrust in the banking industry. People were worried about losing their personal savings due to investment bankers using that money for risky investments in securities. 

As a result, the Glass-Steagall Act legally separated US investment banks from commercial banks in 1933 (learn more about it here). 

However, it was repealed in 1999. The financial industry’s evolution eroded the act’s power. By 1999, US banks needed to compete with two institutions that weren’t subject to the Glass-Steagall Act: nonbank financial institutions, like mutual funds and money markets, and foreign banks.

Some believed that modern risk management techniques could prevent another financial crisis without the Glass-Steagall Act. Others argue its repeal was among the factors that led to the 2008 financial crisis. 

Future

Today’s investment banking analysts often say they spend the vast majority of their roughly 95- to 120-hour workweeks perfecting PowerPoint decks and Excel sheets. Perhaps that’s partly why, for young college graduates, investment banking’s shine has dulled in recent years. 

The entry-level salaries are still competitive, starting at a roughly $100K per year base for a first-year analyst (that's not including bonuses, which can be almost $100K per year). But some younger bankers now find jobs in private equity and tech more alluring due to their more reasonable hours and similarly high salaries. 

Plus, some argue that excelling in the career can be a health hazard. Stories of interns and associates dying after long hours on the job have popped up in the news over the past few years.