ORGANISATIONAL STRUCTURE OF INVESTMENT BANK:

An investment bank is split into the so-called front office, middle office, and back office. While
large full-service investment banks offer all of the lines of businesses, both sell side and buy
side, smaller sell side investment firms such as boutique investment banks and small broker-
dealers will focus on investment banking and sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors buying
securities. For corporations investment bankers offer information on when and how to place their
securities in the market. To the investor, the responsible investment banker offers protection
against unsafe securities. The offering of a few bad issues can cause serious loss to its reputation,
and hence loss of business. Therefore, investment bankers play a very important role in issuing
new security offerings.

Generally, the breakdown of an investment bank includes the following areas:

Corporate Finance:
The bread and butter of a traditional investment bank, corporate finance generally performs two
different functions: 1) Mergers and acquisitions advisory and 2) Underwriting. On the mergers
and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and
structuring a merger between two companies. If, for example, a company wants to buy another
firm, then an investment bank will help finalize the purchase price, structure the deal, and
generally ensure a smooth transaction. The underwriting function within corporate finance
involves shepherding the process of raising capital for a company. In the investment
banking world, capital can be raised by selling either stocks or bonds to investors.

Sales:
Sales is another core component of any investment bank. Salespeople take the form of: 1) the
classic retail broker, 2) the institutional salesperson, or 3) the private client service
representative. Brokers develop relationships with individual investors and sell stocks and stock
advice to the average Joe. Institutional salespeople develop business relationships with large
institutional investors. Institutional investors are those who manage large groups of assets, for
example pension funds or mutual funds. Private Client Service (PCS) representatives lie
somewhere between retail brokers and institutional salespeople, providing brokerage and money
management services for extremely wealthy individuals. Salespeople make money
through commissions on trades made through their firms.

Trading:
Traders also provide a vital role for the investment bank. Traders facilitate the buying and selling
of stock, bonds, or other securities such as currencies, either by carrying an inventory of
securities for sale or by executing a given trade for a client. Traders deal with transactions large
and small and provide liquidity (the ability to buy and sell securities) for the market. (This is
often called making a market.) Traders make money by purchasing securities and selling them at
a slightly higher price. This price differential is called the "bidaskspread."

Research:
Research Analysts follow stocks and bonds and make recommendations on whether to buy, sell,
or hold those securities. Stock analysts (known as equity analysts) typically focus on one
industry and will cover up to 20 companies' stocks at any given time. Some research analysts
work on the fixed income side and will cover a particular segment, such as high yield bonds or
U.S. Treasury bonds. Salespeople within the I-bank utilize research published by analysts to
convince their clients to buy or sell securities through their firm. Corporate finance bankers rely
on research analysts to be experts in the industry in which they are working. Reputable research
analysts can generate substantial corporate finance business as well as substantial trading
activity, and thus are an integral part of any investment bank.

Syndicate:
The hub of the investment banking wheel, syndicate provides a vital link between salespeople
and corporate finance. Syndicate exists to facilitate the placing of securities in a public offering,
a knock-down drag-out affair between and among buyers of offerings and the investment banks
managing the process. In a corporate or municipal debt deal, syndicate also determines the
allocation of bonds. The breakdown of these fundamental areas differs slightly from firm to firm,
but typically an investment bank will have the following areas: The functions of all of these areas
will be discussed in much more detail later in the book. In this overview section, we will cover
the nuts and bolts of the business, providing an overview of the stock and bond markets, and how
an I-bank operates within them.

CORE INVESTMENT BANKING ACTIVITIES:

Front office

 Investment banking is the traditional aspect of the investment banks which also involves
helping customers raise funds in the capital markets and giving advice on M&A's aka mergers
and acquisitions. Investment banking may involve subscribing investors to a security issuance,
coordinating with bidders, or negotiating with a merger target. Another term for the investment
banking division is corporate finance, and its advisory group is often termed mergers and
acquisitions (M&A). A pitch book of financial information is generated to market the bank to a
potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The
investment banking division (IBD) is generally divided into industry coverage and product
coverage groups. Industry coverage groups focus on a specific industry such as healthcare,
industrials, or technology, and maintain relationships with corporations within the industry to
bring in business for a bank. Product coverage groups focus on financial products, such as
mergers and acquisitions, leveraged finance, project finance, asset finance and leasing,
structured finance, restructuring, equity, and high-grade debt and generally work and
collaborate with industry groups in the more intricate and specialized needs of a client.
  Sales and trading: On behalf of the bank and its clients, the primary function of a large
investment bank is buying and selling products. In market making, traders will buy and sell
financial products with the goal of making an incremental amount of money on each trade.
Sales is the term for the investment banks sales force, whose primary job is to call on
institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and
take orders. Sales desks then communicate their clients' orders to the appropriate trading desks,
who can price and execute trades, or structure new products that fit a specific need. Structuring
has been a relatively recent activity as derivatives have come into play, with highly technical and
numerate employees working on creating complex structured products which typically offer
much greater margins and returns than underlying cash securities. Strategists advise external as
well as internal clients on the strategies that can be adopted in various markets. Ranging from
derivatives to specific industries, strategists place companies and industries in a quantitative
framework with full consideration of the macroeconomic scene. This strategy often affects the
way the firm will operate in the market, the direction it would like to take in terms of its
proprietary and flow positions, the suggestions salespersons give to clients, as well as the way
structures create new products. Banks also undertake risk through proprietary trading, done by
a special set of traders who do not interface with clients and through "principal risk", risk
undertaken by a trader after he buys or sells a product to a client and does not hedge his total
exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet.
The necessity for numerical ability in sales and trading has created jobs for physics, math and
engineering Ph.D.s who act as quantitative analysts.

 Research is the division which reviews companies and writes reports about their prospects,
often with "buy" or "sell" ratings. While the research division may or may not generate revenue
(based on policies at different banks), its resources are used to assist traders in trading, the sales
force in suggesting ideas to customers, and investment bankers by covering their clients.
Research also serves outside clients with investment advice (such as institutional investors and
high net worth individuals) in the hopes that these clients will execute suggested trade ideas
through the Sales & Trading division of the bank, thereby bringing in revenue for the firm. There
is a potential conflict of interest between the investment bank and its analysis in that published
analysis can affect the profits of the bank. Therefore in recent years the relationship between
investment banking and research has become highly regulated requiring a Chinese wall between
public and private functions.

Middle office

 Risk management involves analyzing the market and credit risk that traders are taking onto the
balance sheet in conducting their daily trades, and setting limits on the amount of capital that
they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk
overall. Another key Middle Office role is to ensure that the above mentioned economic risks
are captured accurately (as per agreement of commercial terms with the counterparty),
correctly (as per standardized booking models in the most appropriate systems) and on time
(typically within 30 minutes of trade execution). In recent years the risk of errors has become
known as "operational risk" and the assurance Middle Offices provide now includes measures to
 address this risk. When this assurance is not in place, market and credit risk analysis can be
unreliable and open to deliberate manipulation.

 Corporate treasury is responsible for an investment bank's funding, capital structure

management, and liquidity risk monitoring.

 Financial control tracks and analyzes the capital flows of the firm, the Finance division is the
principal adviser to senior management on essential areas such as controlling the firm's global
risk exposure and the profitability and structure of the firm's various businesses. In the United
States and United Kingdom, a Financial Controller is a senior position, often reporting to the
Chief Financial Officer.

 Corporate strategy, along with risk, treasury, and controllers, often falls under the finance
division as well.

 Compliance areas are responsible for an investment bank's daily operations' compliance with
government regulations and internal regulations. Often also considered a back-office division.

Back office

 Operations involves data-checking trades that have been conducted, ensuring that they are not
erroneous, and transacting the required transfers. While some believe that operations provides
the greatest job security and the bleakest career prospects of any division within an investment
bank, many banks have outsourced operations. It is, however, a critical part of the bank. Due to
increased competition in finance related careers, college degrees are now mandatory at most
Tier 1 investment banks. A finance degree has proved significant in understanding the depth of
the deals and transactions that occur across all the divisions of the bank.

 Technology refers to the information technology department. Every major investment bank has
considerable amounts of in-house software, created by the technology team, who are also
responsible for technical support. Technology has changed considerably in the last few years as
more sales and trading desks are using electronic trading. Some trades are initiated by complex
algorithms for hedging purposes.
How Investment Banking Operations Differ From Other
Banks
Unlike commercial banks and savings and loans, investment banks do not seek cash deposits
from customers in the form of checking and savings accounts, and they do not make traditional
interest-bearing loans to individual customers.

Investment banks instead make their money primarily

 By advising corporate clients on the creation of stocks, bonds and other securities
 By underwriting securities
 By facilitating mergers and acquisitions and securities exchanges that may go
along with them.
 And by brokering (or selling) securities to investors.

Investment bankers have also created a broad array of investment options to go along with
traditional stocks and bonds, including securities derivatives such as call and put options, which
allow investors to lock in a buy or sell price on an investment at a future date, and credit default
swaps, which insure bond buyers against the risk that a bond seller will renege on the debt.

Investment banks also lend stocks to facilitate short trades, in which speculators borrow stock
and sell it in hopes that its price will decline before they rebuy it and return it to the lender.