Investment Banker Defined, With Examples and Required Skills

What Is an Investment Banker?

An investment banker is an individual who often works as part of a financial institution and is primarily concerned with raising capital for corporations, governments, or other entities.
Examples of investment banker employers are Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), Bank of America Merrill Lynch (BAC), and Deutsche Bank (DB).

Understanding Investment Banking

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. In doing so, the investment bank takes on a substantial amount of risk. 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

For example, suppose that Pete’s Paints Co., a chain supplying paints and other hardware, wants to go public. Pete, the owner, gets in touch with Katherine, a prominent investment banker. Pete and Katherine strike a deal in which Katherine (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, Katherine and her team begin selling the stock into the open market at $26 per share. However, the investment bank cannot sell more than 20% of the shares at this price given weak demand and is forced to reduce the price to $23 to sell the rest of the holdings. This ultimately leads to a loss for Katherine and her team.

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 excellent number-crunching abilities, strong verbal and written communication skills, and the capacity to work long and grueling hours.

Investment bankers must abide by their firm's stipulated code of conduct and typically sign a confidentiality agreement because of the sensitive nature of the information they receive. 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: (from junior to senior) analyst, associate, vice president, senior vice president, and then managing director.