Investment Banking For Dummies. Matthew Krantz

to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere goodies on the web. If you’re craving even more information on investment banking, check out the free Cheat Sheet at www.dummies.com. Just type "Investment Banking For Dummies Cheat Sheet" in the Search box. On the cheat sheet, you’ll find more on what investment bankers do, why companies buy other companies, and how to get in on an initial public offering, or IPO.

Where to Go from Here

      So, what are you waiting for? The world of investment banking is fascinating, and waiting for you to dive in. When you understand how Wall Street works, you’ll know how to make investment banking work for you, instead of getting worked over by the world’s biggest banks. Flip through the book, and start reading anywhere you see something interesting!

Part 1

      Getting Started with Investment Banking

IN THIS PART …

      Discover the role investment banking plays in the financial system so you can understand the types of services that are provided in the economy.

      See how investment bankers interact with investors in order to appreciate the primary job of moving money from those with extra cash to those who need it.

      Look at the process of selling a company to investors so you can see the purpose of one of the key functions served in investment banking.

      Recognize what goes on in merger activity so you can see how deals are done and what your job may be as an investment banking professional.

Chapter 1

      Introducing Investment Banking

      IN THIS CHAPTER

      

Understanding what investment banking is

      

Recognizing the critical role investment banking plays in the capital formation process

      

Discovering how investment banking compares with traditional banking

      

Finding out how investment banking operations make their money

      

Looking at the different types of investment banks and what they do

      If you’re like most people, when you hear the term investment bank, one of a few things may cross your mind. Your eyes may glaze over as you think about mind-numbingly detailed financial statements and valuation metrics. Yawn. Or, you may think of exciting high-stakes financial maneuvers, like those out of the movie Wall Street, where well-dressed bankers treat companies like Monopoly squares to be dispassionately bought and sold.

      But maybe you’re attracted to investment banking by the mental gymnastics required and the promise of big bonuses and riches to those who are in the know. And that may be why you picked up this book.

      As you can see, there are many preconceived notions about investment banking and investment bankers. Many of these ideas, though, are often pieces of fiction blended with stories of larger-than-life personalities of high finance that spill out of the pages of the money section of financial publications.

In this book, we tell you what really happens in the investment banking world. This chapter introduces you to the high-level reality of what investment banking is. Here, you see how Wall Street really works. In this chapter, you see that although investment banking can be extremely lucrative, it’s also an important facilitator of economic growth and traces its roots to the idea of putting money into the hands of the dreamers and creators.

What Investment Banking Is

      If you’re like most people, you probably figure investment banking got its start in a towering office skyscraper in New York City. But the real story of the origin of investment banking is far less metropolitan, yet arguably even more interesting. Investment banking traces its roots to the age of kings and queens. Many of the most commonly used financial instruments trace their origins to centuries ago when bankers navigated the edicts of rulers and, believe it or not, religious leaders. If you’re interested in the very early days of investment banking, check out the appendix for a quick history lesson.

      But for now, just know that investment banking is, at its very core, pretty straightforward. Investment banking is a method of controlling the flow of money. The goal of investment banking is channeling cash from investors looking for returns into the hands of entrepreneurs and business builders who are long on ideas, but short on bucks.

      

Investment bankers raise money from investors, by selling securities, and then transferring that money to people who need cash to start businesses, build buildings, run cities, or bring other costly projects to reality.

      There are many aspects of investment banking that muddy this fundamental purpose. But in the end, investment bankers simply find opportunities to unlock the value of companies or ideas, create businesses, or route money from being idle to having a productive purpose. (In Chapter 2, you discover the purpose of investment banking.)

      The role investment banking plays

Investment bankers get involved in the very early stages of funding a new project or endeavor. Investment bankers are typically contacted by people, companies, or governments who need cash to start businesses, expand factories, and build schools or bridges. Representatives from the investment banking operation then find investors or organizations like pension plans, mutual funds, and private investors who have more cash than they know what to do with (a nice problem to have) and who want a return for the use of their funds. Investment banks also offer advice regarding what investment securities should be bought or the ones an investor may want to buy.

      

One of the trickiest parts of understanding investment banking is that it’s typically a menu of financial services. Some investment banking operations may offer some services, but not others.

      The services offered by investment banks typically fall into one of a few buckets. One of the best ways to understand investment banks is to examine all the functions that some of the biggest investment banks perform. For example, Morgan Stanley, one of the world’s largest investment banks, has its hands in several key business areas, including the following:

       Capital raising: This part of the investment banking function helps companies and organizations generate money from investors. This is typically done by selling shares of stock or debt.

       Financial advisory: In this role, the investment banking operation is hired to help a company or government make decisions on managing their financial resources. Advice may pertain to whether to buy another company or sell off part of the business. A common business decision tackled by this type of investment banking is whether to acquire another company or divest of a current product line. This is called mergers and acquisitions (M&A) advisory.

       Corporate