Everything You Need to Know about Investment Banking

One of the most lucrative fields in the financial business is investment banking. Investment banks earned over $39,000,000,000 in income in 2018, and that was only in the United States. You're not alone if investment banking appears like a different tongue to you. Even banking professionals are baffled by the complexity of this high-stakes industry.
 
Nonetheless, with beginning salaries of $140,000 per year, it's no wonder that many people aspire to be the next Wolf of Wall Street. Others are simply interested in learning more about how this glossy industry operates. It's not all yachts, nightclubs, and champagne, though. The profession is incredibly taxing, and beautiful investment bankers work over 100 hours per week. After all, Patrick Bateman in American Psycho had to be triggered by something.
 
 
So, what exactly does investment banking entail? Why is this so profitable? 

What Distinguishes Investment Banks from Commercial Banks?

 
Before we describe how investment banking works, let's go back in time and see how it all started. Commercial banks in the United States fulfilled the responsibilities which we now identify with investment banks from the early nineteenth century, but this all altered during the Civil War. 

Jay Cooke, a Philadelphia financier, is at the start of the investment banking story. Cooke founded the first American investment bank in 1861 to assist the federal government in funding its war activities. As a result, one of investment banking's early clients was the US government.
 
The government had to sell bonds to raise funds to support its fast growing economy and finish infrastructure projects like as railway construction during the time. Bonds are similar to IOUs in that they are used to finance large projects between lenders and borrowers. Investment banks would frequently purchase these bonds and then resell them to individual investors for a gain. 
 
Today's investment banks essentially do the same thing, just with new parties. Where do those vast sums in revenue come from, you might wonder? The business concept, on the other hand, is quite basic. Investment banks buy assets with monetary worth, often known as securities, and then resell them for a profit to third parties. This is referred to as “underwriting."

Why don't customers and investors just save their money and do it themselves? One of the major advantages of doing business this way is that the middleman is in charge of distributing the securities. They'll have to keep certain securities if they can't attract enough investors. Investment bankers, when you think about it, are effectively risk taking intermediaries between clients and investors. 

This isn't just a problem for investment banks. Commercial banks also assume risks, but there is a distinction here. Midsized commercial banks that lend modest amounts of money, such as personal mortgages and small loans. 
 
They make money by charging interest to their customers. Investment banks, on the other hand, take substantially bigger risks. They work with both large corporations and high risk startups, serving as a link between the two. 
 
 
The 2008 Financial Crisis
 
They can make a lot of money in the process. All of this sounds fantastic in theory, but let's face it, investment banking has a bad record. The Sub prime mortgage Crisis of 2008 was one of the biggest financial disasters in history, and we all lived through it. This is what transpired. By decreasing the fed funds rate in 2001, the Federal Reserve increased bank liquidity. As a result, US banks were able to make additional loans. 
 
To do so, banks reduced their rules and began lending to almost anyone, regardless of whether or not they had an employment or any money at all. Subprime mortgages are what they're called.

However, you might want to conceive of them as less-than-ideal loans. 
 
Commercial banks could not, of course, continue to make loans indefinitely. As a result, they sold their existing loans to investment banks to make way for new customers. Investment banks repackaged and sold such subprime loans to investors without indicating how risky they were. That didn't matter at the time. 
 
Borrowers were buying real estate, speculators were benefiting, and banks continued to sell existing loans in order to give out new ones. Every enormous celebration, however, is followed by an equally huge hangover. Interest rates began to rise after years of prosperity.
 
Subprime borrowers suddenly found themselves unable to repay their debts and began filing for bankruptcy, sparking fear among all parties concerned. The American economic system had been destroyed by the largest banking crisis ever since Great Depression in just a few months. What transpired was that irresponsible trading by investment bankers resulted in a gigantic bubble. When the bubble burst, everyone was affected. 
 
 

Are All Investment Banks Evil?

So you're probably sure that investment banks are bad and that we'd been better off without them at this time. Right? Wrong! The subprime mortgage crisis of 2008 is only one of several in banking history. The market has previously plummeted, and it will definitely do so again. But it's worth recalling that, flaws and all, investment banking contributed to the development of the United States.
 
Without the help of investment banks, the first railways, mines, and IT corporations would have never seen the light of day. We'll also need investment banks to help us rebuild the economy as we move toward a more environmentally sustainable future. So, where does investment banking go from here? Many people believe that crowd fundraising platforms like Kickstarter will replace traditional funding methods for innovative enterprises.
 
That, however, is not going to occur. While crowdfunding can allow smaller projects to  get off the ground, it isn't dependable enough to support the world's urgently needed renewable energy revolution. Investment banks, on the other hand, have already committed billions of dollars to cleaner energy projects.
 
Of course, renewable energy initiatives aren't the only ones that stand to gain. In the foreseeable future, we may expect investment banking to play a significant role in every world-changing invention. Large investors will always be needed by businesses, and investors will always be looking for fresh opportunities. That is why investment banking will continue to exist

Written By: Ishaan Kumar

Edited By: Nidhi Jha