just wait and see

There is a reasonable amount of anger in our culture directed at Investment Bankers, the reason for this is that they are paid an incredible amount of money for what seems like a relatively easy job. For a while I couldn’t figure out why they earned what they did but Benjamin Graham came along with the simple explanation that made everything click.

Whenever a company needs to raise capital through equity (Issuing new shares on the share market) they go see an investment banker. The issue of new securities (shares) is a complex task, and rather than the company dealing with the process itself they outsource it to people who are more skilled at the job. The investment bankers will then buy a proportion of the stock from the owners at a fixed price (Underwriting). They then issue the new stock. If the shares are sold below the agreed upon price then the investment bank loses money, but mostly they make a profit.

This is the goldmine where investment banks source their profits. Everybody has heard of a company who made a killing on their early day’s of trading, guess who received the majority of those profits…

That is why Investment Banks have so much money, that is why a relatively easy job (In comparison to something like surgery) pay’s so incredibly well.

Note: Investment Banks are probably a necessary evil. For a company to issue new shares they have to release a prospectus which is hundreds of pages in length and they usually have to navigate a jungle of bureaucratic red tape. That means diverting a lot of effort from the company’s core activities, which almost all companies are unwilling to do.