How Investment Banking Is Done - dummies

How Investment Banking Is Done

By Matt Krantz, Robert R. Johnson

Investment banking isn’t just a theory or subject. Investment banking isn’t just an economic function, either. Investment banking is a profession that requires the efforts and expertise of armies of trained financial experts. You may have studied English in college, for instance, but you don’t “do” English. But you can practice investment banking.

Find the financial statements

Chocolate factories need milk, sugar, and cocoa to produce their delicious products. But the raw materials used by many investment banking firms is the information contained on the financial statements. These documents released by companies provide investment bankers with much of the information they need to start analyzing companies and looking for investment banking opportunities.

But these important documents can’t do you any good if you can’t find them. There you discover tools that make it easy for an expert investment banker to retrieve and find all the relevant data from the financial statements, even information the companies may not realized is as valuable as it is.

The importance of financial statements and ratios

Investment bankers in the movies may be best known for roaming the concrete alleys of Wall Street, ears glued to their cellphones, constantly on the hunt for deals. But much of the most important work done by investment bankers is done in front of a computer screen, examining rows of numbers and statistics using spreadsheets and other financial analysis tools.

Investment bankers know it’s not necessary to read financial statements from cover to cover like a book. Financial statements can be read in sections — you jump to areas that interest you at the time. Additionally, some of the best insights that come from the financial statements result from putting the numbers through the paces by applying financial ratios.

Past transactions

Putting a price tag on companies and other investments is a big part of what investment bankers do. There’s no shortage of analysis tools that investors can use to calculate the value of companies. Investment bankers use ratios, such as the price-to-earnings ratio and price-to-book ratio, to value companies.

Sometimes, though, the best yardstick of a company’s value isn’t what an investment banker can calculate, but what the market will bear. Understanding how to obtain and analyze past transactions is one way investment bankers can accurately gauge the value that investors will likely put on a company.

The value of fixed income

Splashy debuts of new companies and their stocks often grab the attention of individual investors. Who can’t resist the success story of an entrepreneur with a dream who brings a company to sell shares to the public for the first time and becomes an instant millionaire? That’s the American way.

But although equity IPOs may get all the attention, much of the heavy lifting of the financial markets is done using fixed-income instruments, also known as debt. Investment bankers are critical cogs in the process of helping companies borrow money at attractive rates in the bond market.