Introducing a career in investment banking

If you’re just starting to research what investment banks do and consider a career at one, this is the perfect place to start.
Investment banking

What is investment banking? 

Confusingly, this term is often used simply to refer to the activities of an investment bank. In this broad sense, it would include activities such as sales and trading, which are not technically investment banking functions, i.e. investment banks do a lot more than just investment banking.

Investment banking has two main functions, and this work is done by the investment banking division (IBD) within an investment bank. These are:

  1. Mergers and acquisitions (M&A): To act as advisors and negotiators for companies that are buying or selling businesses or parts of these businesses.
  2. Capital markets: To help companies raise finance through issuing financial securities – debt, equity and variations of these products, known as derivatives. Here the bank acts as the link between the companies who are looking to sell these securities to raise finance, and the investors seeking to buy them. 

Investment banking is also referred to as the private side of the bank – this work doesn't involve the markets, and isn't publicly known until the deal is completed.

Most investment banks also have a public side – which is where the sales & trading division sits. This part of the bank buys and sells shares for its clients in return for commission.

Employees in the sales & trading division perform one of two roles, or sometimes a combination of the two. 

Bankers working on the sales desk will pitch ideas and suggestions to clients as to the kind of financial products they should be buying, e.g. a particular stock, commodity or currency. With the help of the bank’s research team, they will analyse where they think the market is headed and make recommendations to clients based on these observations. 

The traders with then execute these trades on their clients' behalf. The bank will earn a commission on every trade it processes. 

The work of the sales and trading division falls into two categories:

  • Primary market (issuer to investor): Working with the capital markets team, they act as the sales force to find buyers for new debt or equity that is being issued by the bank (as part of an IPO, for example).
  • Secondary market (investor to investor): This is the buying and selling of debt or equity that already exists within the public markets. For example, a client may decide to sell a stake they own in a company; the bank would work to find buyers for these shares.

While strictly not part of the sales & trading division, many investment banks will also house their own proprietary or 'prop' trading teams. These teams buy and sell securities and other products using the bank's money in order to generate profits for the firm.

How is investment banking different from ordinary banking?

Historically, the role played by investment banks has been clearly distinguishable from those of retail or commercial banks. The latter provide everyday “high street” services such current/savings accounts and credit lines to consumers and businesses. 

However, many financial institutions operate in both markets and are known as "universal" banks. Barclays and HSBC, for example, are among the UK’s leading high street banking chains and also have sizeable investment banking operations. 

In the past, governments and financial regulators have sought to ring-fence the activities of investment banks to prevent banks from speculating with their depositors’ money.  

Coming in the wake of the Wall Street Crash, the 1933 Glass-Steagall Act was a landmark piece of US legislation which prevented commercial banks from engaging in securities-related activities. Banks were given 12 months to decide whether they wanted to operate as a commercial bank or as an investment bank. 

Other countries followed suit, introducing similar measures to separate commercial and investment banking activities. 

However, a repeal of Glass-Steagall was controversially signed into US law in 1999, with other governments again following suit. Many believe this decision contributed to the recent global financial crisis. 

Where does investment banking take place? 

Whereas commercial banking takes place on the high street or wherever there are consumers, investment banks have traditionally positioned themself in the thick of the action, close to the world’s major financial exchanges. 

The City of London and New York’s Wall Street are currently vying for the title of the World’s leading financial centre. They are the heartbeat of the American and European investment banking industries, respectively. 

Other important centres include Frankfurt, Zurich and Milan – where a number of European banks have their headquarters – as well as Shanghai and Hong Kong in Asia. 

Who works for investment banks? 

Investment banks have long been able to cherry pick the crème de la crème of the world’s graduate talent.   

In the US, the profession has traditionally been a popular hunting ground for Ivy League graduates, while Oxford, Cambridge and other leading Russell Group universities are important sources of talent in the UK. 

As it looks to shed a somewhat stuffy reputation, in recent years the investment banking industry made strides in developing a more diversified workforce. This has meant bringing more women into what has traditionally been a male-dominated profession. 

The major investment banks are also becoming increasingly multicultural as they spread their net wider in search of global talent. Research by recruitment firm Astbury Marsden shows that 70% of workers in the City are white, compared with 86% of the wider UK population.

Why is investment banking so controversial? 

The often fractious relationship between the industry and the general public harks back to the role of the banks in bringing about the Wall Street Crash and subsequent global Great Depression.

Media coverage and films like the 1987 classic Wall Street have done little to contradict the negative perception of investment bankers, who are often portrayed as greedy, ruthless individuals. 

In the UK, tension between the industry and the public has coincided with the rapid expansion of London’s financial services sector since the 1980s and subsequent rise in investment banking salaries.  

Fast forward two decades and the sector found itself blamed by the media for instigating the next great global financial crisis. 

Many banks were brought to the brink of collapse through their poor decision making and, in some cases, had to be bailed out by the government using taxpayers’ money. 

Those that survived relatively unscathed were often tarred with the same brush, and the industry as a whole is still having to work hard to repair its battered reputation.