Investment Banking For Dummies®, 2nd Edition
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Copyright © 2020 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2020934912
ISBN 978-1-119-65859-7 (pbk); ISBN 978-1-119-74871-7 (ebk); ISBN 978-1-119-74872-4 (ebk)
Investment banking is the fuel of capitalism.
Human progress takes money and ideas. But more times than not, the people with the money aren’t the same ones with the ideas. Having a mound of cash and no creative ideas only creates a mound of money. Meanwhile, an entrepreneur with all kinds of dreams can’t even break ground if there’s no cash to break ground with.
Enter investment banking. Investment banking has been mankind’s solution to pairing up the people with money and the people with ideas. The combination of money, or capital, and entrepreneurship is a dynamic marriage that’s behind some of mankind’s greatest accomplishments. Investment banking has financed ’round-the-world trade expeditions and built railroads and bridges.
Given the great role investment banking plays in the financial system, it has taken on a larger-than-life mystique with the masses. Many people suspect that investment banks are pulling the strings of the economy, but they may not know enough to realize exactly what investment banks do.
Get ready to take a peek into the private and important world of investment banking. This book could just have easily been called Wall Street For Dummies, because it’s your guide into the complex but pivotal world that Wall Street plays in making the financial system work.
We wrote this book not only to help you understand what’s done on Wall Street, but also to show you how to use some of the financial tools that help measure financial performance. After reading this book, you’ll know how Wall Street works, and how to put its secrets to work for you.
Believe it or not, investment banking affects you.
You may not live in Manhattan, under the shadow of the giant skyscrapers of Goldman Sachs and Morgan Stanley. You may not even be involved in the financial industry — your only dealings with a bank may be when you stop to take money out of the ATM.
But investment banking is so much a part of the financial system that, whether you realize it or not, you fall into its shadow. The fact of the matter is, if you’re like most people, managing your money is falling increasingly on your shoulders. Gone are the days when you could work at a company for 40 years and expect to have a fat pension waiting for you in retirement.
Today, managing your money and making sure you have enough to pay for life’s biggest investments — including homes, cars, college, and retirement — is up to you. You can’t do it alone, though. Stuffing your money into a box and burying it in the backyard definitely won’t cut it. If the termites don’t eat up your life’s savings, inflation will. Each year, prices for goods and services rise, eroding the power of your savings.
The only way to keep up with the ravages of inflation is to invest your money. And that’s where Main Street usually becomes acquainted with Wall Street. Main Street has money in search of returns, and Wall Street is busy cooking up financial investments that it says will deliver those returns.
Typically, investment banking is a pretty heady topic that’s discussed in MBA classes or in important-sounding books with long and intimidating titles. But in Investment Banking For Dummies, we break down the topic into understandable pieces.
Keep in mind that this book, like all the books in the For Dummies series, doesn’t have to be read cover-to-cover (although we’ll be flattered if you read it all). Each of the topics is broken down into easy-to-digest parts and chapters. Feel free to skip around the book to areas that interest you most, and save the parts that seem irrelevant until you’re curious about them later.
While reading this book, keep in mind that we’re trying to explain the topic, not impress you with how complicated the topic is. To help signal when a topic is about to get hairy, look for the Technical Stuff icon in the margin. When you see that icon, it means the information is great if you sleep with a calculator on your pillow instead of a teddy bear, but feel free to skip it if it’s too much to handle right now.
The same goes for the gray boxes of text known as sidebars. In the sidebars, you’ll find interesting but slightly tangential material that you can skip if you want. We found the information interesting enough to put it in the book, but it’s not essential to your understanding of the topic at hand.
Within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.
Finally, we’ve written this book so it contains everything you need to know. If there’s an obscure financial term or ugly-looking formula, we include the details and give instructions on how to use it. Although you’re free to read other relevant financial titles in the For Dummies series, including Fundamental Analysis For Dummies, by Matt Krantz (Wiley), it’s not necessary. If you’re more interested in investing for yourself, rather than the process of investment banking, check out Online Investing For Dummies, 10th Edition, also by Matt Krantz (Wiley). Okay, that’s enough of the shameless self-promotion.
Because you have this book in your hands, we assume that you have a greater-than-average amount of curiosity about the way our financial system works. You probably read the financial press and know what the big financial players are doing in general, but you don’t really understand how and why they’re doing it.
We also assume you’re not an investment banker, because we haven’t met many investment bankers who would admit to being a dummy. But you’re probably someone who wants to know what investment bankers do and maybe even think about being one every time you watch Wall Street.
To draw your attention to certain kinds of information, we use a series of icons. Here’s what the icons mean:
Investment bankers have no shortage of techniques that make their jobs easier. You’ll find those marked with the Tip icon.
This book is a reference, which means you can turn to it again and again, to look up the information you need. However, occasionally, we tell you something that’s so important, you’ll want to commit it to memory, and when we do, we use the Remember icon.
Danger! Danger! Investment banking is full of perils and possible screw-ups. We flag you to these pitfalls so you can avoid taking down a 100-year-old investment banking firm with a multi-billion-dollar blunder.
We use this icon when presenting some real-world examples of the concepts that we're discussing.
Investment banking can be complicated stuff. And it’s a shame that the complexity of investment banking can be a turnoff for some. When we talk about subjects that are especially gnarly, we mark the info with a Technical Stuff icon, so you can breeze on by.
In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere goodies on the web. If you’re craving even more information on investment banking, check out the free Cheat Sheet at www.dummies.com. Just type "Investment Banking For Dummies Cheat Sheet" in the Search box. On the cheat sheet, you’ll find more on what investment bankers do, why companies buy other companies, and how to get in on an initial public offering, or IPO.
So, what are you waiting for? The world of investment banking is fascinating, and waiting for you to dive in. When you understand how Wall Street works, you’ll know how to make investment banking work for you, instead of getting worked over by the world’s biggest banks. Flip through the book, and start reading anywhere you see something interesting!
Part 1
IN THIS PART …
Discover the role investment banking plays in the financial system so you can understand the types of services that are provided in the economy.
See how investment bankers interact with investors in order to appreciate the primary job of moving money from those with extra cash to those who need it.
Look at the process of selling a company to investors so you can see the purpose of one of the key functions served in investment banking.
Recognize what goes on in merger activity so you can see how deals are done and what your job may be as an investment banking professional.