A career in investment banking is lucrative and finance graduates tend to build their career in investment banking. The salary they earn is also more as compared to most of the other financial services.
What makes them earn so?
Yes, their hard work! They spend 90-100 hours a week on the job.
Investment banks perform a variety of activities. They sell their services to the government and corporations and make huge money during their activities. Let’s take a closer look at the revenue streams at investment banks and understand their working nature here.
Revenue streams at investment banks:
Basically, investment banks finance trade and investment. They have diversified sources of income and hence have a stable flow of income despite drying up of any one of the sources. Take a look.
As simple as it is, the investment banks connect buyers to sellers for a commission. As the deal gets closed in billions, the banks witness a huge amount of commission for every single successful deal.
Yet another simple and risk-free way of making money is by demanding advisory fees. Investment banks have the best knowledge about the financial market status. As a result, many companies seek their advice when raising capital through public issues or other means.
In fact, the banks have a separate department dedicated to the advisory practice. They advise their clients on using instruments, tapping the markets, or timing the public issue. The investment bank charges a high consulting fee in return as they are given by seasoned professionals.
There are investment banks across the world where they invest money on behalf of their clients for a percentage of the above-average return. As they invest their money, they stand as the beneficiaries of the profits generated through trading.
Similarly, another way of making money is looking for arbitrage opportunities through proprietary trading. This is an important source of income because they generate risk-free profits using their strong background knowledge and skills.
Mergers and Acquisitions:
Investment banks charge fees for facilitating various transactions involved in the merging of companies or one company buying the other, i.e., acquisition. The contracts involve multi-billion-dollar businesses.
Investment banks sell securitized assets, i.e., they buy pools of loans or assets from commercial banks and use them with credit enhancement techniques for high-grade investors. They make huge profits through tranches and selling them for higher prices. But it is a risky business though and they may come to the verge of bankruptcy.
Investment banks possess a huge pool of research analysts who can provide up to data reports to their clients. The research reports carry a lot of value and they sell these for a better fee to the individuals or companies who want to access these reports. This is another source of making money for investment banks.
It buys IPOs or buys every share of the company, markets it to the investor, and charges a flat fee. They buy shares at risk. They may get the money back or may at risk of losing.
A collateralized instrument is nothing but a collection of debt obligations. Banks buy a lot of smaller loans and use them as one security, sell them and make a profit. They buy loans for cheaper costs and sell at higher prices on the market.
Dark pools are meant to attract institutional sellers to secretive and anonymous markets while preventing front-running. For this service, the bank charges a fee.
Apart from these above methods, investment banks make money through swaps, market making, hedge funds, and private equity. As an investment banking professional, you have various avenues to learn and bring money to your organization.