an inside look at investment banking, 2014

7/27/2019 An Inside Look at Investment Banking, 2014

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WELCOMEYouve probably heard a lot about investment banking in the news, and may even have

a vague idea that you want to work as an investment banker. But how well do you really

understand the industry? Do you want to work in equies or corporate nance? Will

the buy-side or sell-side be right for you? Know your DCF from your EBITDA? And your

spreads from your spots?

It can all be a bit overwhelming, especially if you dont know where to start. But thats

where we come in! This guide will tell you everything you need to know about investment

banking: from the ins and outs of the sector, to the dierent roles and divisions, to what

professionals think of their everyday work, and praccal ps and interview advice.

Weve consolidated all of these juicy bits in one handy place so that you can make sure

that investment banking is right for you, and also ensure that you only apply to jobs thatyou want. Securing a job in investment banking is not easy, especially in this economy.

But with a lile help from Inside Buzz youll have all of the tools necessary to wow in your

interview and land that job as an investment banker.

Good luck!

The Inside Buzz editorial team


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An Inside Look at Investment Banking, 2014 Edion

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Printed in the UK


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CONTENTSTHE INS & OUTS OF INVESTMENT BANKINGInvestment banking explained.................................................................................................

Whos who in an investment bank?.........................................................................................

CORPORATE FINANCEWhat is corporate nance? .....................................................................................................

Whos who in corporate nance? ...........................................................................................

My 24 hours in corporate nance: an IPO...............................................................................

SALES & TRADING

EqUITIESWhat are equies? ..................................................................................................................24 hours in equies..................................................................................................................

FIxED INCOMEWhat is xed income? .............................................................................................................

FOREIGN ExCHANGEWhat is foreign exchange? ......................................................................................................

My 24 hours in foreign exchange.............................................................................................

COMMODITIESWhat are commodies? ..........................................................................................................

WHAT YOU ALSO NEED TO KNOWBuy side vs. Sell side: what are they, what the heck is a hedge fund

and which role is right for you?.... ..........................................................................................

Investment banking vs. Investment management: whats the

dierence and which one is best for you? ..............................................................................

THE BANKING INTERVIEWTricky interview quesons.......................................................................................................

Interview Advice & Tips on Geng Hired................................................................................

Analysing Financial Statements...............................................................................................

THE ABCS OF INVESTMENT BANKING..........................................................................

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11

17

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59

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THE INS AND OUTS OF INVESTMENT BANKING


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J.P. Morgan, Credit Suisse, Goldman Sachs, Morgan

Stanley and Barclays. No doubt you are familiar with

those staples of the investment banking landscape if

you are at all interested in the world of nance. You

may be thinking that a career in investment banking

would be the ideal move for you. But do you know what

investment banks actually do? Its not a straighorward

thing to explain, but lets start by stang that its not

invesng, nor banking. Investment banking is really

the raising of capital (money companies need to help

their business grow) on behalf of clients by buyingand selling securies (something that represents a

monetary value, such as a stock or bond). They are not

like retail or commercial banks because they do not

take deposits from individuals.

Companies that have turned into the investment

banks we know today began by oering services called

merchant banking. Somemes this name is sll used,

but today people are more likely to call it corporate

nance. These are services investment banks oer to

helps companies raise capital so that they can improve

their business. This can mean advising a company on

buying another company, orchestrang an IPO or

brokering a merger between two companies. In an

investment bank today, the sales and trading of other

instruments such as bonds, foreign exchange and

commodies are lumped in with corporate nance

under the umbrella of investment banking, thoughtradionalists would consider them slightly separate.

But because banks have a commercial branch and

an investment banking branch, sales and trading sit

in the investment banking side and have started to

become grouped together with the merchant banking

acvies.

In the structure of a typical investment bank, youll

nd the roles are broken down into three categories,

or places within the bank: the front oce, middle

oce, and back oce. The front oce is really the

face of the bank, they are the ones that have the

most interacon with clients and actually perform the

transacons. The middle oce watches over the front

oce, making sure that they are not taking too much

risk with the banks capital and that all regulatory rules

and compliance procedures are followed. The middle

oce also includes HR and some other support roles.

The back oce handles the tasks of making sure the

numbers are correct on all trades, as well as IT and

assistant dues. In these pages well break down this

large industry to help you beer understand how it all

ts together, what the dierent divisions actually do,

what daily life is like should you become an investment

banker and how to ace your interview.

But do you know what a derivave is? Or what aspot price means? Or how you go about valuing a

company? If any of those quesons intrigues you,

then you are ready to delve into the wild world of

investment banking.

INVESTMENT BANKING ExPLAINED

Its not a straightforward thing to

eplain, but lets start by stating that its

not investing, nor banking.

The main dierence between an investment

bank and a commercial bank is that a

commercial bank takes deposits. They have

nothing to do with, for example, bond or

stock markets like investment banks do and

the deposits are the way that they raisefunds. Think of a commercial bank as a kind

of broker, providing loans and dierent

types of accounts for individuals and

companies. An investment bank plays with

longer investments to try to make money.


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Investment banks are huge, mul-naonal

corporaons, so they need an army of employees

to keep the business going. In its simplest form,

an investment banks employees are broken down

into three categories: front oce, middle oce and

back oce. Though there are a lot of dierent roles

within each category, these broad divisions will give

you clues as to whether a certain posion is client-

facing, deals with internal policies or is tasked with

making sure the banks image is maintained in the

media.

The front oce is the face of the investment bank

or fund. They meet with current and potenal

clients, execute the trades that make money and

determine the direcon of the company. The roles

considered part of the front oce include:

Sales:

Salespeople are responsible for speaking to

their various clients, suggesng trades for them

and communicang orders to the trading desk.

Salespeople can deal with individuals, companies,

investment funds and even hedge funds. All of their

clients are called the buy side because they are the

ones buying the securies. The investment banks

themselves are considered the sell side because

they are the ones that are selling investments. Sales

people need to be able to mul-task and listen tovarious conversaons at once. For example, if your

traders are talking about a great deal or something

in which they have a great price, you need to be

paying aenon to that conversaon while at the

same me thinking about which of your clients

might want in on that trade. You will also need to

keep up on the markets and know whats going on

in the world at all mes including polical, social

and economic issues. Many salespeople write

daily roundups about their thoughts on certain

markets and events and spend lots of me on the

phone as well. There are many salespeople out

there, but the successful ones maintain strong

relaonships with their clients by suggesng

creave and lucrave trades that neither the

client, nor compeng salespeople have thought of.

Traders:

Traders, of course, make the trades based on

the orders from the salespeople and clients. But

traders dont just do what they are told by the

salespeople! A traders main aim is to keep the

investment bank liquid (make sure that assets are

not ed up and can be sold easily with minimal

loss. The most liquid asset is cash), so they will also

perform trades where they make some prot on

the spread. This means that they will buy (bid) a

security at one price and sell (ask) it for a higher

price, keeping the gain from the bid-ask dierenal.

Obviously traders need to be good with numbersand be able to do quick calculaons in their head.

Though many traders focus only on one or a small

secon of markets (for example gold or cocoa) they

nonetheless need to be able to multask and pay

aenon to the ny numbers changing on several

screens at once. Traders also need to have the

WHOS WHO IN AN INVESTMENT BANK

They need an army of employees to

keep the business going.

As the conal Gordon Gekko said to Bud

in Wall Street: No, no, no, no you dont

understand. I wanna be surprised. Astonish

me pal. New info I dont care where or

how you get it just get it. Gordons spot

on but a word of valuable advice: dont do

anything illegal to get that precious info!



ability to make hard decisions very fast if it looks

like a trade may be cosng money, but youre not

sure whether or not to get out of it, a few minutes

indecision could see millions wiped o your book.

If you are trading in internaonal markets, be

aware that you may be in for some long days and

also have to trade from home in the middle of the

night in a market on the other side of the world.

Research/Analyst:

This is also considered a front oce funcon.

Basically, researchers research! They read tons of

data, arcles, and anything else they can get their

hands on to help salespeople and traders make good

calls about the markets. They also use their data to

suggest trades and help guide the direcon of the

investment bank by construcng nancial models.

Analysts in the corporate nance department help

with IPOs, specically gathering the informaon

for pitchbooks. Though not as client-facing as sales

and trading, the research sta can be involved inclient meengs from me to me. Analysts do

have contact with all posions in the bank and

oen work closely with managing directors. The

MDs main job is to culvate various relaonships

with clients so they do not have me to know

everything they need to know for a specic meeng

or IPO pitch, and thats when the analysts come in.

MDs and associates depend on the researchers to

provide them with the informaon they need to

make successful deals and approach the right kinds

of clients. They may not get much of the glory, and

may be involved in several all-nighters, but its a

fact that an investment bank would cease to run

without the research department.

MDs:

The managing directors of the bank are the

head honchos but usually have worked their

way up through the bank. Their main job

involves maintaining relaonships, networking

and trying to impress potenal clients.

Corporate nanciers:

Corporate nance sits a bit apart from the other

sales/trading divisions of the bank. They are not

trading and making markets, but rather helping

companies with certain nancial situaons. They

act as a broker or consultant when companies

need to raise capital, are looking to merge or buy

another company or want to issue debt all of

which may enhance the value of their company.

This can include helping to manage investments or

even suggesng a mergers and acquisions (M&A)

strategy. In this instance, the corporate nance

people at the investment bank will help the M&A

deals go through. Corporate nanciers must notonly know whats going on in the nance world,

but also have clear philosophies on invesng,

stocks and how to value companies. You can use

your creavity here by listening to what your client

wants to achieve and then suggesng interesng

and potenally groundbreaking ways they can go

about making their thoughts a reality. Yes, the

corporate nance team gets a lot of the glory and

while salaries can go sky high, youll have to work

hard for it.

Investor relaons (funds only):IR sta are responsible for PR as well as keeping

all investors and shareholders abreast on whats

going on in the bank. Regular work can consist of

pung together reports and seng up meengs

and events for potenal investors. IR work can

also be unpredictable and involve lots of crisis

management. Markets move very fast and this

can impact funds posively and negavely and the

investor relaons team needs to make sure that

they can answer any potenally uncomfortable

quesons that may arise.

Like the name suggests, the middle oce bridges

the gap between the front and back oces. These

are the kinds of roles that look into what is going

on in the front oce and makes sure its not

negavely aecng the bank overall. The middle

oce is comprised of:

The managing directors of the bank

are the head honchos but usually have

worked their way up through the bank.


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Risk management:

The biggest part of the middle oce is probably

the risk management team. These people make

sure that the traders are not taking too much risk

and that theyre not doing things like leaving their

posions exposed overnight. Risk people also have

the ability to cap how much traders can actually

trade, if they feel that they are taking on too much

risk. Employees in the risk department must not

only be good with numbers but must also have the

guts to stand up to traders who are being careless

with their books.

Compliance:

Another important role in the middle oce is

compliance. This should not be overlooked as

investment banks are now being scrunised more

than ever; making sure every trade is done by the

book is just as important as making money.

The back oce consists of all of those niy-griy

roles that keep the place running smoothly.

This includes:

Operaons:

The operaons people are the ones who check

over every trade to make sure the numbers are

correct and the trading desk has bought or sold

what they were supposed to (if the trade was

to buy USD but instead the cket says selling

USD, well then, youve got a problem). They also

constantly reconcile trades and open balances

with banks and other nancial instuons. These

are the editors and the proofreaders who make

Here are two cauonary tales of rogue traders causing major damage. They underline the

importance of controls, risk management and eecve oversight.

Barings Bank: in 1995 Londons oldest merchant bank collapsed because of Nick Leeson, who was

head of derivaves in their Singapore oce. Leeson was meant to be arbitraging (meaning buying

a futures contract on one market and selling it at a slightly higher price on another market almost

immediately and making a small prot on the dierence)futures contracts from the Nikkei 225

index which were listed on the Osaka Securies Exchange in Japan and the Singapore Internaonal

Monetary Exchange in Singapore. But Leeson decided to hold onto his futures contracts instead

of selling immediately because he was convinced that the Japanese market would strengthen and

make him more money. When he was proved wrong he decided to start forging documents, for

example saying that a 200 million loss was actually a 102 million gain. In the end he lost the

bank 827 million, more than they had and there was no way to recover. Part of the problem was

that Leeson was the trading oor manager and in charge of selement operaons, so when he

began forging trade documents, no one saw. In the end he blamed the fact that no one at the bank

could see how this arrangement could spell disaster and that people were too scared of looking

foolish to do so and those that did think something was up were ignored.

In 2008 it emerged that trader Jerome Kerviel at French bank Societe Generale, was forging fake

index futures trades. Soc Gen has claimed that all of these rogue trades totaled 49.9 billion euro,

way more than Kerviel was authorised to handle. When the bank eventually uncovered these

illegal trades, they decided to get out of those posions immediately. Closing out those trades cost

the bank 4.9 billion euro. Though Kerviel claims that what he did was pracced regularly by other

traders, and some people think there must have been people helping him with the fraud instead ofworking alone, Soc Gen maintains that every few days before these posions would have triggered

an automac warning from the trading system, Kerviel would close out the trades and move them

so that no one would nd out. On the occasions that he was quesoned, he would say that the

trade was a mistake, cancel it and then create another trade with a dierent instrument to replace

it. But because it was in another form, no one noced. It would have taken a very eagle-eyed risk

manager to have avoided this disaster.



sure the execuon is awless. This is another role

that may be overlooked by people on the outside,

but any investment banker knows that a bad

operaons team can cause unnecessary headaches

and completely mess up a protable, well-working

team. For an operaons role youll need to be

comfortable working on a variety of IT systems or

at least learning them quickly. Of course, an eye for

detail is extremely important as is good listening

skills. If a trader asks you to check something

urgently, they will be very upset if they have to

repeat it. The operaons team also communicates,

usually by phone, with other operaons teams as

well as salespeople at the other banks who are

doing business with them, so youll need a good

rapport with people, especially when lots of money

is on the line.

IT:

Another increasingly important role in an

investment bank that is considered part of the

back oce is the IT department. No longer just

xing desktops that are slow, IT departments in

investment banks are now in charge of complexcomputer networks, trading plaorms, and

communicaons systems. They may also be tasked

with developing bespoke soware to facilitate

the banks trades and content management. And

not only the upkeep is important, but also the

security of those systems as well. If any sensive

informaon gets out, it could spell real trouble for

the bank. Nowadays praccally all trading is done

electronically and sensive informaon is also kept

electronically.

Investment bankers are also always looking for

easier and faster trading and content management

systems so its up to the IT sta to suggest

possibilies and implement them. Traders are

also now increasingly set up to work from home

so that they can trade out of oce hours, another

thing IT will have to look aer. No one can do

their job if the system goes down, something

investment bankers will not tolerate, so the IT

sta need to be proacve in systems upkeep as

well as suggesng cung-edge technology thatwill give the investment bank a clear edge over

the compeon.

Investment banks deal with a wide range of

nancial instruments and clients, and therefore

have tons of dierent roles to ll. The work is

high-pressure and days can be extremely long,

but it can also be sasfying, interesng and

the paycheck usually makes all that hard

work worth it.

On 6 May, 2010, the Dow Jones Industrial

Average suddenly plummeted 1,000 points.

People struggled to gure out what could

cause such a sudden, massive drop. One

theory was that someone had purposely

or inadvertently added a few extra zeros

to a trade order to sell shares. Aer that

some companies shares actually ended up

trading at a penny! There was a 20 minute

window when prices went haywire and all

of those trades ended up being cancelled.

There are all kinds of conspiracy theories

as to the role of computers and electronic

trading plaorms in arguably the weirdest

day the Dow has seen so far.

The paycheck usually makes all that

hard work worth it.


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CORPORATE FINANCE


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Within an investment bank, the corporate nance

team acts as a nancial advisor for large companies,

corporaons and even some governments. When

a corporaon wants to grow the value of their

company they will approach the corporate nance

team at an investment bank to rstly, suggest ideas

about how to reach their goals, and may also ask

them to actually help broker the deal(s). Most of

the me a corporate nance team will suggest a

merger or the purchasing of a company or part

of a company if the client wants to expand theirbusiness and increase prot. If the client wants to

raise funds they might suggest an IPO (Inial Public

Oering, also known as oang) issuing stock

or advise issuing other securies such as debt.

They may also bring up things like joint ventures,

long-term investments, merger and acquision

possibilies, debt restructuring or management

buy-outs (or buy-ins). The dierent suggesons

may come about through nancial modelling or

simply a deep understanding of that parcular

industry/experience within that industry.

Even within the corporate nance division there

are lots of teams, each one handling a dierent

way that the client can implement their nancial

plan for the future. One team may only deal with

IPOs, one team may only deal with manufacturing

companies, so once you are on a team, it is your

job to know that industry inside and out so as to be

able to advise your clients with expert knowledge.

Keeping tabs on industry news and moves by other

companies in the sector are important as well, so

that when it comes to actually guiding an IPO, you

price shares appropriately that will make the deal

a success.

Corporate nance is one of the most demanding

areas of investment banking. Forget 9-5 or even

7-7, your hours are set by your clients and not

the opening and closing of markets. But for all of

those hours and hard work, you will be rewarded.

Analysts are expected to crunch numbers and

know about the clients, competors and other

potenal clients in the industry. Associates are

sll responsible for data, but also have account

management dues so are client-facing. Managers

and VPs leave the details up to the analysts and

are mostly concerned with keeping clients happy,

fostering new relaonships with potenal clients

and general networking to keep the bank in the

know about industry moves. There are many

dierent roles within corporate nance but all are

challenging, interesng and can be very lucrave.

WHAT IS CORPORATE FINANCE?

Once you are on a team, it is your job

to know that industry inside and out so

as to be able to advise your clients with

epert knowledge.

Forget 9-5 or even 7-7, your hours are

set by your clients and not the opening

and closing of markets.



The whole corporate nance secon is split up

into deal teams and within those teams are the

dierent roles. Though one team may only be

concerned with M&A and another might only

work with the oil industry, their structure is

basically the same.

Analysts

First you have the analysts. They are at the boom

of the ladder and unfortunately, thats most likely

where youll have to start. Analysts do a lot of thenot-so-fun work that is necessary for transacons

to go through. As an analyst youll nd yourself

evaluang nancial statements as well as

reviewing things like management structure.

You may also have to value a company based on

similar companies in the same industry and see

how your client measures up.

Aer analysis comes the nancial modelling that

will tell the team if a proposed deal is a good

idea or not and from there youll draw your

conclusions as to what the best strategy is does

the client need to raise more cash? Should they

be purchasing a competor or is it beer to let

a competor purchase them? You might already

know what DCF Analysis is, and that is an example

of a nancial model. There are many other kinds

of models and which ones youll use obviously

depends on which team you sit, but you could be

tasked with looking at balance sheets to predict a

companys future prots, thinking broadly about

a company and its situaon (what if this happens

or what if that happens), or you could be asked

to use a complicated mathemacal algorithm

dealing with risk, credit or interest rates. If you

are an analyst, spreadsheets will become your

best friends.

If you are into maths, you may love being an

analyst; or you may only be using the posion as

a way to move up. Either way, you will be worked

hard as an analyst. A VP or director might have

a hunch about a certain deal, but it is you who

will provide the data to either back up or disprove

his (unfortunately it usually is a his) theory. This

means that you are on a short lead and cannot

get anything wrong. Before you submit any work

make sure it is double and triple checked forerrors as well as grammar mistakes. Tradionally

analysts work long and varied hours. If no deals

are going on the oce might be quiet and youll

simply have to keep up on the news or maybe

work on a new model youve been discussing with

colleagues. But then it can seem like everything

happens at once and youll have so much work

that leaving the oce aer midnight will become

a regular occurrence. You could be working on a

pitchbook for an IPO one day, then handling the

models for a proposed merger the next, then

making changes to the pitchbook, then doing

some last-minute wring for a transacon on

lile noce. Analysts are expected to work fast

and provide the data asked for without quesons

(since directors are only concerned with selling

the bank to clients, they will usually promise them

mulple reports, models and presentaons in a

few days me, which means you might have to

pull some all-nighters to get it all done). But banks

WHOS WHO IN CORPORATE FINANCE?

First you have the analysts. They

are at the bottom of the ladder andunfortunately, thats most likely where

youll have to start.

Banks will have some nice perks such

as free food and complementary tais

home in addition to the standard perks.


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will have some nice perks that can make the many

long nights slightly more bearable such as free

food and complementary taxis home in addion

to the standard perks of free or heavily subsidised

gym memberships, dry cleaning services and free

ckets to concerts and sporng events. Youll

work very long hours and might not get much

of the glory, but you will be an integral part

of your team.

Associates

Associates are higher up in the pecking order than

analysts, but somemes not by much. They might

handle the more complicated models, but they

generally oversee and hand out work to the analysts

as well as concern themselves with the pitches

to the clients for whatever deals the team thinks

are best. This takes the form of pitchbooks and

generally associates work with analysts to create

these. The pitchbooks are used to gain new clients

and usually for each potenal client, the associates

and analysts create two: a general pitchbook

outlining the bank and what the corporate nance

division has accomplished, and then a more specic

one that contains parcular models aimed at

exactly what this client wants to achieve. So though

associates sll have to do a bit of the grunt work of

the analysts, they do also get face me with clients,

which can be a nice change. This also means that

while you need to be technical, you also need

good so skills and need to be able to meet and

socialise with clients. An associate with an MBAmight have a beer work life than one without,

as this can mean more experience and thus more

responsibility and more leeway from the bosses.

Expect long hours again, though not as long as

when you were an analyst. This is simply a reality of

working in corporate nance your regular leaving

me might be around midnight and youll probably

have to work weekends regularly at rst, then

possibly around 10 hours on weekends once youve

had a few years as an associate. Here you dont

necessarily have to be a maths wiz to shine, but as

long as you possess general business knowledge,

business sense and an overall grasp of the

markets and your clients, you can really stand

out as an associate.

Vice Presidents

As you may have guessed, VPs are on the next

rung of the ladder. They oversee the analysts

and associates and while they sll keep an eye

on the modelling, meet with the analyst and

associates to go over work and make any changes

to models or presentaon, they really dont do

any themselves. They do, however, oversee the

pitches because one of the main responsibiliesof the VPs is client management. These are the

people who spend me with most of the clients

and so will be in lots of meengs and disappear

for many working lunches and dinners. VPs get

paid more, have more responsibility, but also

travel a lot vising clients, so they are somemes

barely in the oce. They regularly are called out

to client sites on a moments noce so planning

a work week or even a weekend at home can

be dicult and nearly impossible. They are also

probably the ones who represent the company

at various conferences and industry gatherings,

trying to gain new business and network. Yes,

the grunt work is over by this point and youre

probably geng paid quite a bit, but you may not

have much me to spend your money or see your

family as oen as youd like.

Directors/Managing Directors

This is where all that nancial modelling pays o!

MDs sit at the top of the corporate nance food

chain so they prey much get to do what they

want. They are in the oce only when they want

to be and only visit the clients that they want to

usually the most important clients are the onesthe directors handle themselves. The directors

real job is to represent the team, make sure the

clients are happy and drum up as much new

business as they can.

As long as you possess general

business knowledge, business sense

and an overall grasp of the markets and

your clients, you can really stand out asan associate.



Though the deals within corporate nance can take

on many dierent forms, a regular one is an IPO.

IPO stands for Inial Public Oering (if you hear a

company is oang or considering a otaon

or an oering, they are considering an IPO) and

this is when a company decides to issue stock,

primarily to raise funds. The corporate nance

team in an investment bank comes in by arrangingthe deal and taking some of the risk. You may have

heard of the term underwring - this is what the

investment bank does in an IPO, they advise the

company releasing their shares and then they take

on some of the risk involved in actually being able

to sell those securies. IPOs can make up a large

amount of what corporate nance teams do so its

important to know exactly what goes into one and

what the meline of a deal looks like.

Hear it through the grapevine

When a company wants to issue shares becausethey may want to raise money without borrowing

- many mes the informaon leaks out and then

dierent investment banks rush to pitch their

services to that company. This is where the

relaonships that the directors and VPs culvate

come in. If they have a great network of people

they know in the business, they are more likely

to be the rst to know that a company is thinking

about an IPO. The directors get paid the giant

sums to basically keep up on what everyone in the

industry is doing and to keep relaonships going. It

may seem like all they ever do is go out to dinner

with clients and potenal clients, but this will be

how the bank nds out about upcoming deals and

how companies will think of your bank rst when

they want to do a deal.

General pitching

Once a higher up in the corporate nance team

hears that a company might be considering an IPO,

they will go back to their analysts and associates

and have them put together a pitchbook. The rst

pitchbook usually assembled is a general one that

outlines key points about the bank and highlights

any successes that the corporate nance teamhave had. Obviously this is the pitch to the

company to use this bank as their IPO manager.

Then the higher-ups will try to schedule at least

a few follow-up meengs in the hopes that they

are one of the investment banks hired to manage

the deal. And usually there is more than one bank

working on one public oering so being on good

terms with corporate nance teams from other

banks is important too. One bank will usually take

the lead on an IPO (the manager), but there may

be another or even two other banks in charge of

specic areas of the deal.

Second pitchbook with more detail

Then aer some inial contact, the corporate

nance team will produce their second pitchbook.

This pitchbook is much more detailed and will use

nancial modelling to get the data needed. This is a

lot of work, much more so than the rst pitchbook

you might want to bring a pillow and a toothbrush

to work cause youll probably be spending a night

or two in the oce. A reason the second pitchbook

may be very complicated is if this specic company

has never previously issued stock and therefore

there is no data to present! If there is no history of

what will happen, how much money they will be

able to raise, etc. the analysts and associates must

do a lot of comparable analysis, and that takes

me. These pitchbooks will probably have the

following informaon: general informaon about

the bank and its achievements, similar deals that

MY 24 HOURS IN CORPORATE

FINANCE AN IPO


21/71

the bank has done to highlight their experse in

the area, the projected value of the company based

on other companies in the same industry that have

issued shares and highlighng the banks place in a

league table of other underwriters.

The actual pitch

Its probably annoying for the analyst and associatesthat work so hard on the pitchbooks (the VPs and

MDs also work on them, but not as much as the

analyst and associates do) that they dont get to

make the actual pitch, but thats how it goes! An

MD and a VP and maybe a stock analyst, who will

deal with the shares once they are issued, will be

the ones to give the presentaon to the company

to try to persuade them to use their bank as an

underwriter. Because at this point in the deal, MDs

and VPs from several banks are parading in and out

of their oces, this is generally referred to as the

beauty contest.

Youve won! Now the real work starts

Once your team has been named as the manager

of the IPO, next you have to get together with the

other parcipants who will be helping out with the

deal. This list usually includes: the main players

of the company itself like the CEO, CFO and any

important department heads; the accountants

for the company; the companys lawyers; the lead

manager; any co-managers and lawyers or council

for the underwriters.

Then the due diligence begins. Before the stock

is issued, there needs to be a lot of researchundertaken to make sure the meline and the

price the stock is issued at is correct so as to make

the deal a success. The rst step in this research

is to speak at length with the management of the

company as well as to get to know that company

and the industry inside and out. This could mean

researching other similar companies or making

site visits to the companys dierent plants, oces

or factories. The idea is to get a sense of output,

growth, health and general direcon so that the

performance of the company in the short term, as

well as long term, can be assessed.

Draing

The prospectus is the basic markeng tool used to

get people to invest, or buy the stock that will be

issued. The prospectus is put together, or draed,

aer the due diligence is nished and is the most

labour intensive step aer the second pitchbook.

The rst dra of the prospectus is wrien by the

issuing companys lawyers, then gets passed

around from team to team as dierent dras of

the document are made. The more teams that are

involved in the deal, the longer the draing stage

as everyone has dierent ideas about the tone, the

style, what should be included and what should be

le out. There are mega draing sessions where the

various teams meet to discuss the prospectus and

those meengs can even involve some analysts and

associates on occasion. Usually this stage takes upto 10 weeks and most mes ends up at an all night

nancial prinng company to get it completed on

me.

And this isnt just a case of agreeing on the

words and then hing print. Usually for an IPO

you might need as many as 20,000 copies of the

MDs and VPs from several banks are

parading in and out of their offices,

this is generally referred to as the

beauty contest.



preliminary prospectus (called the red herring,

or red for short) and 10,000 copies of the nal

version! These nancial printers are set up so

that the teams that oversee the nal dra of the

prospectuses can work uninterrupted for two days

in a row if needed. They get food delivered to them

whenever they want and there are even showers

on site great for not smelling, bad for taking away

excuses to leave.

Geng the word out

At this point the prospectus is nalised, printed

and has been sent to as many potenal investors

as the team can think of. Now you need to follow

up to get the greatest number of investors on

board as possible. Both the VP and MD of the

lead manager and the management of the issuing

company will come up with a presentaon to showto as many potenal investors as they can. Other

markeng materials are constructed by analysts

and associates such as selling memos and other

documents that salespeople will use to ence their

clients into invesng.

This part of the whole process is somemes

called the road show because the companys

management, along with the representaves

from the managing corporate nance team, will

somemes make hundreds of presentaons in

loads of dierent cies. It can basically mean weeks

of hotel rooms and airplanes. And at a road show,

the associates role unfortunately amounts to lile

more than babysing and making sure everyone

has their luggage and hasnt le their passport at

home.

Is the price is right?

Part of pung the prospectuses together means

pricing the stock that will be oered. Usually a

range will be set by the underwring team while

doing the due diligence. Hopefully the team have

got it right and the stock ends up trading at the

high end of the range. The best case scenario is a

stock that trades above the top of the range and

that happens when there is a lot of buzz behind

the stock and it becomes a very sought-aer

investment. Conversely, if no one cares about yournew stock then it may trade below your predicons,

which is not good.

Then when the stock is issued its up to everyone

to watch how it performs, some may go up slightly

while others may look healthy on the day the stock

is issued and then drop on day two. Hopefully the

due diligence and markeng phases have worked

together to create a good product that is well

publicised.


23/71

SALES AND TRADING


25/71

The equies desk in an investment bank deals

with company stock (called shares in Europe).

Depending on where you are, you will have to

follow the various indices around the world such

as the FTSE, NASDAQ, Dow, CAC and the DAX. Not

only will you have to pay aenon to the numbers

which stocks have gone down and which are up

but you will have to learn about how companies

are valued. Youll have to form opinions on how

companies become overvalued and undervalued,

good investment strategies for those looking toinvest in stocks and how certain social and polical

events can aect companies share price.

What is a stock market?

A stock market is an aucon where stocks are

traded; stocks are traded on a stock exchange.

Tradionally the stock exchange is an actual

locaon where people, banks and hedge funds

call in their orders and then the order is placed.

Examples of stock exchanges are: the New York

Stock Exchange, the Frankfurt Stock Exchange and

the London Stock Exchange. Nowadays there are

also virtual stock exchanges where everything is

done over computers. The NASDAQ is an example

of a virtual stock exchange.

The NASDAQ

This stands for Naonal Associaon of Securies

Dealers Automated Quotaons and though it is

US-based, is completely virtual and electronic.

Started in 1971, it came out of over-the-counter

trading model, which means there is no physical

exchange to go through, all orders are processed by

computers and can be completed from anywhere.

Besides being ahead of its me by using computersystems to buy and sell stocks, it was also the rst

exchange where people could go online to trade

stocks.

The London Stock Exchange

This exchange has been in existence since 1801

but buying shares stared as early as the 1680.

This came out of the need to raise money for two

marime trading voyages, one to China and one

to India. It is thought that by 1695 there were

140 companies whose shares were being sold

and traded. The moo on the coat of arms of the

exchange translates to: My word is my bond.

What is an index?

The indices listed below are a way to keep track

of various stocks and whether their stock price

is moving up or down. An index will only track a

certain part of a stock exchange. For example,

the FTSE 100 only tracks 100 companies but it is

considered a great indicator at the overall health of

the Brish economy.

The FTSE 100

First youll have to know how to pronounce it

(footsie) then youll need to know that it stands

for the Financial Times Stock Exchange 100. It was

started in 1984 jointly by the newspaper and the

London Stock Exchange (which has now turnedinto the FTSE Group, which is an independent

company all together) to list blue chip (or large cap)

companies appearing on the exchange. So many

instruments are based on the FTSE and it is broadly

regarded as a way to determine the health of the

UK economy.

Youll have to form opinions on how

companies become overvalued and

undervalued and how certain social and

political events can affect companies

share price.

WHAT ARE EqUITIES?



The S&P 500

This is an index of 500 blue chip companies in the

US. Blue chip companies are large companies that

are thought to be stable, well-run and protable.

They are called blue chips because in poker the

blue chips are the most valuable. Like the FTSE

100 in the UK, the S&P 500 is a good gauge of the

US economy. All of the companies on this index

are public and also trade on the New York Stock

Exchange and the NASDAQ. Since 1957 the index

has been published by Standard & Poors, which

actually publish many dierent indices.

The CAC

The CAC 40 is a French stock index of the 40

French companies on the Euronext Paris Exchange

(formerly the Paris Bourse) with the highest market

capitalisaon. Market capitalisaon, or marketcap, is when you determine how much an enre

company is worth based on its share price. So if

the share price is x, you mulply that by all of the

shares that have been bought by shareholders, in

theory giving you the value of the enre company.

The CAC 40 includes companies such as LOreal,

BNP Paribas and AXA but market cap is calculated

regularly and companies may drop out of the CAC 40

if their market cap falls. Though the companies are

French, many of the stockholders are internaonal

and come from Britain, Japan, Germany and the

US. Because many of those companies listed aremulnaonal, the CAC 40 has a very internaonal

feel and aects other internaonal markets too.

The DAX

The Dax, or the Deutscher Aken IndeX, has been

around since 1988 and lists the 30 biggest companies

trading on the Frankfurt Stock Exchange. Each

quarter they review the list of companies named on

the index and make any appropriate changes so the

largest companies are always represented on the

index. Again, this is a great general benchmark for

the German economy.

The Nikkei

This is a price-weighted index from Japan. A priceweighted index means that the percentage of

the index made up of a parcular stock depends

on the stock price. So the higher the stock value,

the larger the poron of the index it will make

up. This is dierent from a market-weighted index

where the equity market value (value of the share

mes number of shares outstanding shares that

are out in the market and have been purchased)

determines how big a percentage the company

gets. The Nikkei was started in 1950 by the Nihon

Keizai Shimbun newspaper and is reviewed yearly.

What makes stocks move?

Many changes in a countrys economic situaon,

to a specic company announcing that their CEO is

stepping down (Google Steve Jobs and Apple), can

aect stock price. Perhaps the biggest trigger for a

stock moving is interest rates. The consumer price

index tracks the price of everyday goods and if

those prices rise, people fear inaon. When there

is inaon it means that money is not as valuable

anymore because it takes more of it to buy things

than before. That also means that interest rates

rise to compensate. All of this means investors look

to more low-risk moves, such as bonds, as opposed

to trading stock.

People also constantly look at the GDP of a country

to get an idea of the overall economic health. If

GDP slows down then a recession may not be

far behind. In a recession everything slows down

The FTSE 100 First youll have to

know how to pronounce it!


27/71

and demand for companies products suer. The

companies prots will shrink and that will cause

their stock price to plummet.

If youre tracking an individual company you need

to pay aenon to the earning per share (EPS).

BOX Companies release this gure quarterly

and it not only tells you about the health of a

company, but whether its stock is overvalued

or undervalued. If analysts have predicted a

companys EPS at one price, but the actual price

is lower, the price of that stock will fall as people

look to sell of a stock that is in worse health than

they thought. If the opposite happens and the

EPS comes in higher than expected, that

stock will rally.

How stocks are measured and valuedYou cant just go on the price you see on your screen.

People have developed hundreds of dierent raos

to value stocks and compare them. These are the

most valuable ones you need to know if you want

to work in equies:

P/E rao

This stands for Price to Earnings and simply is the

price of the share divided by the Earnings Per Share

(EPS). This will tell you the price of the stock related

to the earnings of the company. So if a stock has a

high P/E rao that means its expensive as you are

paying more for those earnings per share. If two

companies have the same EPS but one has a higher

P/E rao, that one is a more expensive of the two

and means you are paying more for the same EPS.

Oen the P/E rao as expressed by saying that a

company is trading at 20 mes its earnings if it has

a P/E rao of 20.

PEG rao

This stands for Price/Earnings to Growth rao and

takes the P/E rao and then accounts for how fast

the EPS for the company will grow. A stock that

is growing rapidly will have a higher PEG rao. A

stock that is well priced will have the same P/E rao

and PEG rao. So if a companys P/E rao is 20 and

its PEG rao is also 20 some might argue that the

stock is too expensive if another company with the

same EPS has a lower P/E rao, but that also meansthat its growing faster because the PEG rate is 20.

EPS, or Earnings Per Share, will tell you how much

each share of a company will earn. Its probably

the most important thing to look at when deciding

to invest in a company. The most basic formula

to calculate EPS is prot divided by a weighted

number of outstanding shares. Its important to

use a weighted number as the actual number of

shares bought can change oen.


29/71

24 HOURS IN EqUITIESJ.P. MORGAN, EqUITY RESEARCH ANALYST

I work in the European Equity Research team here

at J.P. Morgan, which is divided up by industry.

I work in the Property team, with whom I did

my summer internship whilst at university. Our

job involves analysing the companies we cover,

publishing reports and advising clients. We look at

all aspects of the industry and all types of property,

including house prices, shopping centres, oces

and residenal, as well as transacons made by thebig property companies.

I usually get in between 6.30 and 7.00am, depending

on how busy we are. The rst couple of hours are

spent looking at the newsow and pung together

our Daily research report, which is sent out to

clients at around 9.00am. This includes updates on

what happened in the market the day before, any

newsow from the industry such as acquisions or

disposals (buying or selling properes or property

developments) made by one of our stocks, as well

as transacons or deals across the wider sector.

My team covers around 45 European Real Estate

stocks, which also all regularly report earnings

results. We include results commentary in our

Daily, such as whether results are in line, above or

below expectaons.

Around 9.00am we get breakfast. Then the rest of

the day is very varied if one of our companies has

reported results then well spend the day updang

the models, sending out alerts, going to meengs,

speaking to salespeople and traders as well as

calling clients. Clients will somemes talk to one

of our salespeople rst if they have quesons on

a stock, but if they have more specic quesons

about the company, then they talk to analysts like

us.

We also publish a huge, 400-page annual report in

September the Property Handbook. This gives a

more fundamental analysis of the property market,

as well as highlighng our top picks for the year.

These are the stocks we would advise our clientsto invest in.

For each of the stocks we cover, we give either a

buy, hold or sell recommendaon, which clients

look at when deciding whether or not to invest. We

upgrade/downgrade stocks periodically depending

on where we think the share price is going to go.

When speaking to clients, we always explain the

reasons for our recommendaon, which are a

combinaon of many dierent factors.

We also regularly aend property tours and

site visits of our companies assets and new

developments. For instance, one of the companies

we cover recently acquired The Traord Centre in

Manchester, and organised a trip for analysts and

investors to see the shopping centre.

Usually I go home around 6.00 or 7.00pm.

Occasionally though, when were working on a big

sector report it can be later. Generally, I would say

that my days are very varied - it is hard work but we

have a lot of fun too.



Fixed income is an instrument that you as an

investment banker can use to make a prot for you

and your clients. The name xed income explains

exactly what it is: debt securies that pay an

amount of income at xed intervals over a certain

length of me. There are many dierent kinds of

xed income deals you could make and each work

in a dierent way. Here are the basic xed income

products that make up the desk.

BondsThis is the biggie in the xed income market. The

most basic denion of a bond is a kind of loan.

If a company issues bonds and you buy one, you

are basically loaning them money. In exchange,

they will pay you interest on a xed schedule

for the length of the loan, or bond. When the

bond expires, the company will also pay back the

original amount of the bond, or the principal.

Bonds are great for people who feel comfortable

invesng in something that they know will

pay them quarterly, annually, or whenever

is spulated.

Bonds are issued by lots of dierent places; here

are the ones you need to know about:

Government: Government issued bonds are

considered one of the most stable investments

you can make. Actually, there are three kinds of

securies to go for: Treasury bills (or T-bills), which

mature for up to two years; Treasury notes, that

go on from three to 10 years; and Treasury bonds,

which last from 10-30 years. Of course these are

seen as stable because really, is the government

going to default? Well, in theory, no, but stranger

things have happened. If you keep a close eye on

the Eurozone economies you may not be so sure.

But the amounts of the payments are aected by

interest rates, so theyre not totally without risk.

Municipal: These are regularly called munis.

They are bonds that are issued by the local

government or a city. Munis are also considered

quite a safe investment, as cies rarely default

(but again, never say never...). You will mostly

hear talk of munis in relaon to the US but

a UK muni market does exist and there are

also operang muni markets in Sweden and

the Netherlands.

Corporate: These are issued by a company

just like they would issue stock (but dont get

confused a stock is a share in the company

and a bond is a debt security). Issuing bonds

is a great way for a company to raise money

if they are looking to expand or for things

like new oces.

Another important aspect of the bond market is

the rangs. Standard & Poors, Moodys, and Fitch

Rangs are the credit rang agencies you need

to familiarise yourself with. Bonds are rated on ascale from AAA (the best ones, most likely to meet

payments) to D (a greater chance of default which

means youll lose your money). The agencies label

their levels slightly dierently, but in general the

bonds that have a rang of at least BBB are most

likely complete payments. Anything with a rang

lower than that is considered a high-yield bond,

more commonly is known as a junk bond (also

called high-yield or speculave bonds when

you want to be a lile more tacul about it). Well,

the name alone should tell you all about those! Yes,

they can be high yield, but they are so risky that

there is a big chance the issuer will default and that

that means you dont get your money.

WHAT IS FIxED INCOME?


31/71

Derivaves

Derivaves are tricky. Were used to seeing

something, its got a price tag, and thats how

much its worth. But a derivaves value changes

based on a host of dierent factors. Here are the

basic ones to learn:

Forward: A forward contract means that

someone agrees to buy something from

someone else at a future date for a xed price

got that? So say that you want to buy a car,

but you dont want to buy it for another year.

The car dealership agrees to sell you the car you

want in exactly one year for 20,000. Well, in a

years me the value of the car could go up or

down, depending on a lot of things. So if the

value goes up, the dealership sll has to sell you

the car for 20,000 and that means that youhave made a prot, while they have lost money.

Opon: Instead of a forward, you can buy an

opon. So, if in a years me the value of the car

is only 18,000, but you sll have that forward

saying you have to pay 20,000, the opon gives

you the opon to opt out of the deal. That 20,000

is also called the strike price, or the price that the

contract will be carried out for, if the deal happens.

Interest Rate Swap: If you nd the nance world

interesng, youll love the idea behind interest

rate swaps. Basically, this allows you to swap one

cash ow for another. There are a lot of reasons

for someone to do this, but lets say that theres

a company that pays interest on a loan and that

interest is oang, meaning that it changes. If

the directors of that company decide they dont

like being exposed that way, they can swap their

payments with another company whose interest

rate payments are xed. So Company A pays

Company B their oang rate and Company B

pays Company A their xed rate. Swaps can be

structured in a number of ways, but this is the

most basic. Coming back to xed income, this is

another way that a parcular party can ensure

that they are geng a payment at a xed interval.

So as you can see, investment banking isnt just

buy low, sell high. Fixed income is a useful

market to understand, and an essenal tool in the

investment banking world.

Investment banking isnt just buy low,sell high.

Imagine your local bookseller, instead of

requiring you to pay 10 for the book in

four weeks me, says to you, If you come

to me in four weeks Ill sell you the book

at 10 but you are not obliged to buy the

book from me (Your local bookseller is, of

course, unlikely to give you this opon for

free. If anybody oers you a free opon you

should generally take it). In this case you

would buy the book from the bookseller

in four weeks me only if the price for the

book at all other booksellers were greater

than 10. In other words you would exercise

your opon only if it were valuable for you

to do so. But even prior to exercise, your

opon has a value. That value is made of two

components: inherent value (the amount bywhich the market price of the book at that

me exceeds the 10 price tag you and the

bookseller have agreed) and me value.



FX, or forex, stands for foreign exchange. Every bank

has an FX desk but its more important to some

banks than others. Forex trades are all over-the-

counter this means that there is no centralised

body or place where things are regulated and

traded. The trades take place directly between two

pares with no exchange house in the middle. Every

country has its own central bank where currency is

controlled, but there is not one global body that

oversees the currency market. FX is also interesng

since anyone can get involved from someone daytrading from home for fun, to global instuons

making a deal ahead of an internaonal purchase,

to hedge funds speculang in more than one

currency, the forex markets are open to everyone.

Some countries decide that they want more

control over the value of their currency and so they

have what is called pegged or xed exchange rates.

Such countries include: Venezuela, the Bahamas

and the city-state of Hong Kong. Their central bank

ensures that their currency is directly correlated

to something else, whether that is gold or another

major currency. It is helpful for controlling inaon

and also used by smaller countries to ease trade,

since their currency is directly related to a major

world currency or instrument. Most countries,

though, have a oang exchange rate, and that rate

is dictated by the markets. Some economists think

this way is more helpful as it allows currencies to

work themselves out in the markets and makes

it easier for countries to deal with any ups and

downs the currency may face. The UK, US and the

Eurozone all have oang exchange rates.

FX desks have a separate group for Emerging

Markets FX. These are currencies from countries

that are experiencing tremendous growth.

They were formerly known as less developed or

Third World countries but now those terms are

now outdated. These countries, such as China,

Brazil, South Africa and India, are seen as havingtremendous upside and potenal for investment,

but at the same me carrying a lot of risk.

Many large, mul-naonal corporaons that

are not necessarily in the nance sector may

actually have their own trading division to help

with their internaonal business. For example,

a large construcon rm may employ their own

forex traders so that they can handle converng

one currency into another when there is a piece

of equipment they need to purchase overseas.

So FX can actually reach into many dierent kindsof business and knowing how to trade currencies

doesnt necessarily mean that youll only be able

to nd work at a bank or fund. But besides those

kinds of situaons, the main hubs for FX markets

are: London, New York, Singapore, Hong Kong and

Tokyo. At one bank there will be FX traders spread

out all over the world so that all me zones are

covered and the desk can take advantage of moves

that may happen when only one market is open.

This is a true 24-hour business, and trading can

take place any me of the day or night (only on

weekdays; youll be happy to hear that markets are

closed during weekends).

Dierent kinds of FX trades

There are dierent ways of trading foreign exchange

and the most common are the following:

Spot This is the shortest kind of trade that

WHAT IS FOREIGN ExCHANGE?

Knowing how to trade currencies

doesnt necessarily mean that youll

only be able to find work at a bankor fund.


33/71

usually is seled in two days. Its the most

simple kind of trade as you literally trade x for y

and thats it.

Forward

Weve covered forwards in the chapter on xed

income, but this can play a part in the FX market

too. An exchange rate is agreed but the deal

doesnt actually take place unl a pre-determined

date in the future.

Future

Again, part of xed income but also can be used

in trading foreign exchange. Its like a forward but

more standardised and regulated.

Opon

This is another xed income instrument used in FX

where you put a trade in place but then have the

opon to back out of it before the date where the

trade would be done. You have the right, but not

the obligaon to go ahead with the trade unl the

contract expires.

Swap

An FX swap is when a trade is done but then

reversed later. So you buy x, sell y and then in

three months you sell x back for y. A swap is usually

achieved by making a spot trade and also a forward

at the same me.

How to quote an exchange rate

Every currency in the world has a three leer code.

For the euro it is EUR, the code for the pound is

GBP, the US dollar is USD. To quote an exchange

rate between two currencies, one code will belisted directly aer the other, usually as: GBP/USD.

In this example wed call GBP the base currency and

USD the counter currency. Aer the two currency

codes there will be a number, for example 5. If you

saw GBP/USD 5 that means that 5 USD = 1GBP (we

just used nice round numbers for this example,

its not actually the current rate. If it were, wed

hope that all you Brits would be too busy living

the good life somewhere in America to be reading

this!). In these quotaons its always how many

of the counter currency make up one of the base

currency.

What aects exchange rates?

The rst thing that can make the value of a

currency rise and fall is something to do with

that countrys polical system. This can mean

anything from elecons, to some kind of scandal

involving government ocials to a new president/

prime minister/ruling party. Any new party that

is expected to radically change policies or throwthe country into any kind of instability will have a

negave eect on the countrys currency and it will

weaken. This will also be the case should there be

quesons about who will actually lead the country

or who is in charge.

The state of a countrys economy will also aect

the strength of that countrys currency. Any me

a report comes out about a countrys GDP, budget

decit or surplus, or a change in economic policy,

you will see the currency of that country move.

Of course the nature of the announcement will

determine which way the currency goes, but any

change or announcement having to do with the

scal state of a country will aect its currency.

Traders themselves can also inuence forex

markets. If enough traders perceive one currency

to be on the decline, they might pull their

investment in that and invest in another currency

that they think is more stable. That will make the

demand for that second currency higher, but the

rst one will suer, all because of percepon. This

is whats called market psychology and is a very

interesng component of the FX markets tryingto gure out what people will do when an event

occurs. Successfully predicng this is an important

skill possessed by outstanding traders.

Youll be happy to hear that marketsare closed during weekends.



A typical day goes from 7am to 7pm and

sometimes days can last longer than that,

depending on whats going on. A former FX

salesperson described their typical day as

consisting of the following tasks:

The first thing I do when I get in to work is read

summaries of what happened overnight and

after I left the office the day before. These come

from news outlets and other colleagues in the

business, either from my bank or others.

Then I take the most important points from

everything Ive read and write my own summary

of whats going on and what I think will be

important for the day(s) ahead. The distribution

list for my morning summaries is long as I make

sure that everyone knows what Im thinking in

case they want to do a trade.

After my summary I get on the phone, which is a

very important part of being a salesperson. Someof my customers always want to be called in the

morning to discuss what has happened overnight

and my general thoughts, others might call

or email me to discuss anything theyve found

interesting in my morning update.

Then I make sure to keep reading news headlines.

Bloomberg News is on constantly so that we

can see whats going on minute-to-minute. The

markets move fast so you can never ignore the

news for too long.

Talking to traders is another important part of

my day. Since they execute orders from me and

my clients its important to know what they see/

what they are thinking and always have a good

relationship with them. Sometimes traders and

salespeople can have their differences but not

always; one of my best friends is a trader.

Again, I do another round of calls with customers,

especially if something important has happened

since Ive been in the office. Sometimes they

call me and ask me to look at specific things and

may ask my opinion on some issue and then

ask me to come up with trades for that. This is

where my creativity comes in and what makesa salesperson truly good at their job. The trick

is to come up with trades no one has thought of

yet so that your customers know that they are

getting value out of your relationship and not

just the same old ideas they could get anywhere.

At this point in the day I usually end up doing

trades so I will be communicating with clients as

well as with the trading desk.

By this time the US market is open and its

not unusual for something important to have

happened. In that case Ill call the appropriate

customers again to discuss and hopefully do a

few more trades.

Hopefully its a little quiet by this time so I take

that chance to think about what has happened

that day and try to predict what is going to

MY 24 HOURS IN FOREIGN ExCHANGE

Youll soon realise that talking to

customers is really the number one duty

of a salesperson.

Bloomberg News is on constantly so

that we can see whats going on minute-

to-minute.


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happen as a result. Again, this is something

extra that not every salesperson does but it can

really add value for your customers and help youunderstand the market better. If your predictions

are proven right, your credibility will skyrocket

but more than that its going that extra mile to

make sure youre prepared and if you enjoy the

markets you wont mind doing it.

I always end the day with more calls to

customers. As a salesperson you cant be afraid

to pick up the phone and talk markets and youllsoon realise that talking to customers is really

the number one duty of a salesperson.

Actually execung a trade can happen in a number of ways. You can do a deal over the phone,

or probably more likely youll do it electronically. If youre looking to get into nance, familiarise

yourself with Bloomberg. Before Michael Bloomberg became mayor of New York City, he created

a company that not only specialises in market informaon, but also an important trading

plaorm. Everyone on the trading desk (and in sales for that maer) has a Bloomberg terminal,

where they can chat to other traders and salespeople, see market numbers and execute trades.

Many people execute trades over Bloomberg chat (which is just like IM). Some will do deals over

the phone and then conrm the details over Bloomberg chat aerwards. There are other trading

plaorms and e-market plaorms too where people can execute a trade. Doing a trade via some

kind of electronic plaorm is geng more and more commonplace, and over the phone deals

are becoming a thing of the past.



Sometimes investment banking can seem

abstract - you have to pay attention to how the

market reacts to events or you are betting

on which way interest rates will go. Youre not

trading real things you can touch and hold, and

sometimes that can be hard to wrap your brain

around. But one section of an investment bank

that does away with all that is commodities.

What is a commodity?

Commodities are products or goods with a

uniform quality and price across the market.

These can range from everyday items such

as coffee, cocoa or cotton to other goods that

may or may not be part of your daily life such

as gold, oil and coal. Generally all commoditiesare grouped as either hard commodities - ones

that are extracted, such as minerals - or soft

commodities - ones that are cultivated by man.

Commodities trading can be fascinating and

can cover a range of products and issues such

as agriculture, energy and precious metals. If

you work in commodities you could be selling

sugar to Cadbury or buying copper on behalf of

a manufacturing giant. It may not get the press

that the bond market or corporate finance does,

but it is just as rewarding and challenging.

How are commodities traded?

Commodities are traded on commodities

exchanges, so that the goods can be regulated.

When a trade is made, there is a contract produced

that details the trade. Sometimes a commodities

trade can be for spot price, meaning that the

buyer agrees to a certain price for the good and

the seller will transfer that good to the buyer

immediately. More often, though, commodities

deals are done as forward or futures contracts. A

forward or future is when a contract is written up

that states that a good will be sold in the future

for an already determined amount of money. So

if a company that makes soy milk needs to buy

soya beans to make their product, the soya bean

farmer may say that his crop will not be ready

for another five months, but they will enter into

a futures contract where they agree the amount

that the soy milk company will pay the farmer

and they pay it now. The company likes this

because if the price of soya beans rises in those

five months, they wont have to pay anything

extra as theyve already locked in the price. The

WHAT ARE COMMODITIES?

If you work in commodities you couldbe selling sugar to Cadbury.

Youre not trading real things you cantouch and hold, and sometimes that can

be hard to wrap your brain around.


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farmer also benefits from a futures contract

because if the price of soya beans goes down, he

wont suffer a hit as he has already negotiated

his price.

Whats the difference between a future

and forward?

Though a future and forward is basically the same

thing, they cannot be used interchangeably. A

future is more regulated than a forward. Futurescontracts go through the exchange so they are

very strict and there is no way either party can

get out of or default on the contract. A forward

is less formal and more of a personal agreement

between the buyer and the seller. Though you

dont have to go through the exchange, which can

be beneficial, you also dont have the exchange

to back you if the other side decides they want

out of the contract. But it does mean that you

can call off the trade too if it becomes clear that

it will no longer be in your interest.

Another difference between a future and

forward contract is that forwards, because they

are less formal, are set up so that the entire

order is settled at the agreed upon forward date.

But futures contracts can actually be settled over

more than one date and also at daily marked-to-

market rates. This means that the fair value of

the commodity is calculated at the end of each

day, no matter what rates the commodity was

trading at throughout the day.

Options

Options are also a popular contract in

commodities. This is a contract similar to a

future except that each side has to option not

to go ahead with the contract. Every option

has an expiration date so if neither side wants

to enter into the option before that date, the

contract ends. Analysts often work on complex

models to try to predict how values will move

and if an option will be profitable or not as tryingto determine volatility is an important part of

commodities trading.

Commodities trades dont work in a bubble

and youll have to pay attention not only to

the product you are trading but also things

like weather (if there is a major drought in the

American mid-west, how will that affect corn

prices?), the environment/advances in alternate

energies and how many worldwide products

include things like copper. Youll also need to

think practically - if you buy a large amount of

oil, where are you going to store it? - which can

make for a very interesting career.

If there is a major drought in the

American mid-west, how will that affect

corn prices?


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WHAT YOU ALSO NEED TO KNOW


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The world of investment banking is full of jargon,

unique words, and exclusive phrases, and you HAVE

to become uent in this special language if this

is a world youre looking to inhabit. Two of these

essenal I-banking phrases you need to know,whether youre aiming for the front oce, middle

oce or back oce, are buy-side and sell-side

and the dierence between the two.

The buy-side

The buy-side is made up of the clients of the

investment bank, which covers lots of dierent

types of companies, organisaons, and everything

in between. They could be individuals, private

companies, pension funds, asset management

funds, proprietary trading desks (prop desks,) hedge

funds or mutual funds. They are the ones buying

the securies, hoping for high returns on their

investments, and thats why they are called the buy-

side.

The sell-side

The sell-side is the investment bank itself. Theinvestment bank is the one selling the securies

and investment ideas, so its easy to remember that

they are the sell-side. People on the sell-side direct

their clients to securies which they think are in

the clients best interest, and which can generate a

prot for themselves too.

The variety of the buy-side

Since so many dierent kinds of companies

come under the umbrella that is the buy-

side, lets take a closer look at a few andidenfy how theyre dierent from each other.

Investment/asset management rms :

These rms manage a porolio of stocks,

bonds, real estate anything for the investor.

Again, an asset management rm can have a

variety of clients, ranging from pension funds

to companies to individuals. An investment

manager (somemes called a fund manager)

devises an investment strategy for the client

and keeps them updated regularly with reports

and analysis. Investment management funds

are part of the buy-side because they buy the

dierent products from investment banks to

maximise their porolios. Generally these kinds

of rms deal with longer-term investments.

Asset manag

an inside look at investment banking, 2014

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