Matthew Krantz - Investment Banking For Dummies

Because you have this book in your hands, we assume that you have a greater-than-average amount of curiosity about the way our financial system works. You probably read the financial press and know what the big financial players are doing in general, but you don’t really understand how and why they’re doing it.

We also assume you’re not an investment banker, because we haven’t met many investment bankers who would admit to being a dummy. But you’re probably someone who wants to know what investment bankers do and maybe even think about being one every time you watch Wall Street.

To draw your attention to certain kinds of information, we use a series of icons. Here’s what the icons mean:

Investment bankers have no shortage of techniques that make their jobs easier. You’ll find those marked with the Tip icon.

This book is a reference, which means you can turn to it again and again, to look up the information you need. However, occasionally, we tell you something that’s so important, you’ll want to commit it to memory, and when we do, we use the Remember icon.

Danger! Danger! Investment banking is full of perils and possible screw-ups. We flag you to these pitfalls so you can avoid taking down a 100-year-old investment banking firm with a multi-billion-dollar blunder.

We use this icon when presenting some real-world examples of the concepts that we're discussing.

Investment banking can be complicated stuff. And it’s a shame that the complexity of investment banking can be a turnoff for some. When we talk about subjects that are especially gnarly, we mark the info with a Technical Stuff icon, so you can breeze on by.

In addition 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.

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

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

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.

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 appendixfor 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.