Stocks, also known as shares or equities, are bought by investors who want to share in the profits of a company through dividends or the appreciation of the stock’s value. If the share price rises, investors can sell stock to other investors at a profit. If it falls, they might sell them at a loss. This trading occurs in the secondary markets, and the company itself doesn’t directly benefit. It has raised the capital it needs through the shares’ initial public offering, or “IPO.”. This is a very simplified understanding of the functioning of the financial markets. Over the years financial markets have evolved and many complex products and services are offered in the market. In order to support and service these products many specialized segments and roles have emerged. Let us explore some of them.
Investment banks act as “underwriters” on behalf of the company issuing stock. They assume the risk of issuing the stock, and do the work necessary to bring it to market, in return for a fee known as the underwriting spread. The underwriting spread represents the difference between the price the issuing company receives for the stock and the price at which it’s offered to shareholders. In order to spread the risk, particularly for large IPOs, investment banks typically pool their resources, with one acting as the lead underwriter, which manages the deal. The fee charged from the offering are shared proportionately between the underwriting banks based on a written agreement between them.
Investment Fund Management
Investment management is the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate) in order to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds).
Debt and Equity Capital Market Broking
A transaction on a stock exchange must be made between two members of the exchange— an ordinary person may not walk into the BSE (for example), and ask to trade stock. Such an exchange must be done through a broker. A stock market broker buys and sells shares or other securities on behalf of investors.
Mergers and Acquisitions
Specialists in mergers and acquisitions, or M&A, travel the world to work on deals that reshape entire industries. M&A is one of an investment bank’s core functions: to advise client companies on whether to add businesses to their portfolio of assets, sell off divisions or subsidiaries they no longer want to own, or merge themselves entirely with another company, either by acquiring the target firm or selling themselves to it.
Investment Analysis and Research
Investment analysts provide the fundamental research that helps drive investment decision making on the stock markets. While money managers and traders ultimately decide what to buy and sell, the basis for those decisions frequently starts with analysis provided by researchers at the major investment banks, whose work may be supplemented by internally produced research.
In the international financial markets, successful trading strategies are devised by highly educated, highly intelligent professionals known variously as financial engineers, computational finance professionals or, more familiarly in the shorthand of stock markets, “quants.” These are the people who create the financial theories, computer models, valuation techniques and trading programs used by hedge funds, investment banks and other market participants to exploit opportunities that might be missed by average investors.
Hedge Fund Management
The term “hedge fund” is based on the idea that money managers can hedge their bets to ensure a profit, regardless of whether the market goes up or down. Though in recent years, hedge funds have become more popular than ever, the first hedge fund was created more than 50 years ago- in 1949 money manager Alfred Winslow Jones began short-selling stocks while buying others to offset his risk.
Hedge fund managers balance their exposure by using options or futures, simultaneously holding long positions while also short-selling, and other techniques. What distinguishes them from traditional mutual fund managers is their willingness to push the boundaries of normal investment techniques in a quest for unusually high returns.
The foreign exchange market (also called the “Forex” or “FX” market) is the world’s largest in terms of cash value changing hands daily. FX trading involves converting one currency into another and predicting changes in exchange rates based on global events. The point is simple: to profit from currency price fluctuations. FX is an extremely liquid market with numerous participants.
Anyone who has lost money by buying a foreign currency before going on vacation, only to find its worth fell before they arrived to spend it, will appreciate the need to keep an eye on the value of currencies. Banks and their clients face a similar problem, but to a much greater degree.
Commodities market is a physical or virtual marketplace for buying, selling and trading raw or primary products. For investors' purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities.
Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.)
There are numerous ways to invest in commodities. An investor can purchase stock in corporations whose business relies on commodities prices, or purchase mutual funds that have a focus on commodities-related companies.
Corporate banking is the broad term given to different banking services that large companies, governments, or other big institutions need in order to function day to day.
Responsibilities range from the relatively simple business of issuing loans to more complex matters such as helping minimize the taxes paid by overseas subsidiaries, managing changes in foreign exchange rates, or working out the details of financing packages necessary for the construction of a new office, plant or other facility. If an organization is exporting overseas, corporate bankers might arrange a process of international payment or put together “trade finance” packages to ensure the firm is paid by foreign customers.
In many cases, there’s an overlap between corporate banking and financial markets. Bankers working in financial markets help companies raise money by issuing equities or debt.
Private Banking and Wealth Management
As the title suggests, private bankers help wealthy people manage their money in private. Their objective is to provide a more personalized level of service than most individuals commonly find at a commercial bank.
Private bankers need an understanding of financial products from basic stocks and bonds to financial derivatives, private equity and hedge funds. In most cases, the lead banker who manages the direct relationship with a wealthy client will be supported by a staff of experts who can be brought in to address specific questions or needs as required.
At a base level, private equity funds raise money for companies in need of a capital infusion. In that respect, they’re similar to investment banks. But while investment banks raise money by selling stocks or bonds on the public markets on behalf of client companies, private equity funds do it by raising cash from wealthy individuals and institutions like pension funds. In turn, they use this money to invest in companies.
However, the similarity between PE funds and investment banks ends there. Where investment banks don’t take a controlling ownership interest in the companies they take public, PE firms use the capital they raise - along with leverage gained from issuing debt - to assume control of businesses either as co-owners or, often, sole owners.
Risk management is a term that can be applied to many aspects of business, but on a fundamental level it involves protecting a company from negative events. Risk managers strive to make sure the organization isn’t overexposed to plummeting stock markets or other financial pressures that will jeopardize the strength of its balance sheet.
Market risk specialists use mathematical Value-at-Risk (VaR) models to work out the maximum amount of money their bank would lose in the case of a particular event. They also work closely with traders to calculate the risk associated with specific transactions.
If you want to work in the compliance area of an investment bank, brokerage, Mutual Fund Company or other financial institution, you’ll need a healthy respect for rules and regulations. It’s the job of compliance professionals to make sure financial firms operate within the rules set by government regulators.
In addition to interpreting the complicated and ever-changing external rules that regulators lay down, the compliance function creates a system of rules to apply those regulations internally. Compliance officers then communicate these rules to a firm’s employees, and work diligently to enforce them.
Jobs in compliance vary depending on the area in which you work. If you opt for money laundering, you’ll spend your time on the lookout for suspicious transactions. For example, if someone pays cash for a very large quantity of bonds, it’s likely to warrant your attention - particularly if that person or organization has never dealt with the bank before.
The role of rating agencies is to assess the credit worthiness of companies and government agencies that issue debt instruments to investors. Although the issuers actually pay for the privilege of having their business scrutinized, the agencies provide a neutral analysis of a debt issuer’s ability to repay its obligations.
Credit rating agencies provide investors with objective analyses and independent assessments of companies and countries that issue such securities. Globalization in the investment market, coupled with diversification in the types and quantities of securities issued, presents a challenge to institutional and individual investors who must analyze risks associated with both foreign and domestic investments.
Rating agencies look for people with training in finance, mathematics, economics and similar quantitative disciplines.
Typically, analysts at ratings agencies specialize in particular product types such as corporate finance, which is rating particular companies; public finance, which follows local, state and provincial governments; sovereign debt, which is issued by countries; infrastructure debt, which might be issued by a utility company or a government agency that funds development projects like road construction; financial institutions; or the structured finance arena. Depending on their area of specialization, staffers can expect some element of travel to go along with their work.
Most agencies offer young talent considerable opportunity to grow and take on new responsibilities as their careers progress.