An inside look at investment banking 2013
Upcoming SlideShare
Loading in...5
×
 

An inside look at investment banking 2013

on

  • 621 views

 

Statistics

Views

Total Views
621
Views on SlideShare
621
Embed Views
0

Actions

Likes
0
Downloads
17
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

An inside look at investment banking 2013 An inside look at investment banking 2013 Document Transcript

  • AN INSIDE LOOK AT 2013 EDITION fo: Insider career in f nd outs o • The ins a g nt bankin investme job and • L ife on the eer paths diff erent car tion and • Applica advice interview
  • Our AN INSIDE LOOK AT strength is your opportunity. Our strong position in the market has been built on the character and intelligence of our people. To maintain that strength, we are committed to recruiting and developing top talent. This means that if you want to really advance your career, you should become part of our team. It’s our 2013 EDITION goal to make sure you achieve your goals. fo: Graduate Deadline: 11 November 2011 Insider career in f nd outs o Internship Deadline: 11 November 2011 – Asset Management, Finance, IB Risk, Investment Banking, Sales, Trading & Research • The ins a g nt bankin 8 January 2012 – Operations & Business Services, Technology investme job and • L ife on the Apply via the Europe section of our careers website: eer paths diff erent car tion and jpmorgan.com/careers • Applica advice interview2J.P. Morgan is a marketing name of JPMorgan Chase & Co. and its subsidiaries worldwide.©2011/12 JPMorgan Chase & Co. All rights reserved. J.P. Morgan is an equal opportunities employer.
  • CONTENTS CONTENTS INTRODUCTION Introduction............................................................................................................................. 07 About Inside Buzz.................................................................................................................... 07 What’s in this guide?................................................................................................................ 08 THE INS & OUTS OF INVESTMENT BANKING Investment banking explained................................................................................................. 10 Who’s who in an investment bank?......................................................................................... 11 CORPORATE FINANCE What is corporate finance? ..................................................................................................... 15 Who’s who in corporate finance? ........................................................................................... 16 My 24 hours in corporate finance: an IPO............................................................................... 18 SALES & TRADING Equities What are equities? .................................................................................................................. 22 My 24 hours in equities........................................................................................................... 25 Fixed Income What is fixed income? ............................................................................................................. 26 Copyright © 2012-2013 Inside Buzz Ltd. All rights reserved. Foreign Exchange No part of this publication may be reproduced or transmitted by any form or by any means, electronic or What is foreign exchange? ...................................................................................................... 28 mechanical, for any purpose, without the express written permission of Inside Buzz Ltd. My 24 hours in foreign exchange............................................................................................. 30 Whilst every care has been taken in the compilation of this publication, Inside Buzz Ltd. makes no claims as to the accuracy and reliability of the information contained within and disclaims all warranties. CommoditieS What are commodities? .......................................................................................................... 32 Inside Buzz, and the Inside Buzz logo are trademarks of Inside Buzz Ltd. For information about permission to reproduce selections from this book, contact: WHAT YOU ALSO NEED TO KNOW Inside Buzz Ltd, Buy side vs. Sell side: what are they, what the heck is a hedge fund 14 Bateman Street, London, W1D 3AG and which role is right for you?.... .......................................................................................... 34 +44 (0)20 7434 3600 Investment banking vs. Investment management: what’s the Info@insidebuzz.co.uk difference and which one is best for you? .............................................................................. 38 www.insidebuzz.co.uk Printed in the UK4 5
  • INTRODUCTION INTRODUCTION THE BANKING INTERVIEW Tricky interview questions....................................................................................................... 40 Interview Advice & Tips on Getting Hired................................................................................ 46 Analysing Financial Statements............................................................................................... 48 You’ve 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 equities or corporate finance? Will the buy-side or sell-side be right for you? Know your DCF from your EBITDA? And your spreads from your spots? THE ABCs OF INVESTMENT BANKING.......................................................................... 51 It can all be a bit overwhelming, especially if you don’t know where to start. But that’s where we come in! This guide will tell you everything you need to know about investment banking: from the ins and outs ACKNOWLEDGEMENTS....................................................................................................... 57 of the sector, to the different roles and divisions, to what professionals think of their everyday work, and practical tips and interview advice. We’ve 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 that you want. Securing a job in investment banking is not easy, especially in this economy. But with a little help from Inside Buzz you’ll 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 A big thank you to our sponsors6 7
  • ABOUT INSIDE BUZZ WHAT’S IN THIS GUIDE? Inside Buzz is a careers information company that puts a fresh twist on the way graduates and professionals research companies and careers. Year on year, Inside Buzz independently surveys thousands of employees to find out what they really think of their job and the company they work for. This extensive surveying allows Inside Buzz to get the real scoop on everything from company culture and hours, to training, perks and salaries. Most importantly for graduates and job seekers, each company’s interview and selection process is revealed for all to see. Our workplace reviews are renowned for providing an authentic inside look at what life is like at some of the UK’s leading employers. At Inside Buzz, our foremost priority is ensuring that job seekers have all the facts: the good, the bad, and everything in between. An authority on all things careers, Inside Buzz provides graduates and professionals with hundreds of constantly updated employer profiles featuring rankings, quotes and a comprehensive interview advice section. Additionally, Inside Buzz brings job seekers the latest career advice and industry news in our popular article and advice section. Inside Buzz also publishes print and digital career guides. These guides are updated every year before being distributed for free to eager university students across the UK. Our 2012-2013 Career Guides include: An Inside Look at Graduate Employers An Inside Look at Law Firms An Inside Look at Investment Banking Employers An Inside Look at Investment Banking An Inside Look at Accounting An Inside Look at Consulting Based in Soho, Central London’s vibrant media district, Inside Buzz has been a privately owned and independently run company since it was founded in January 2010. st graduate • Get the late articles career news & he web from around t o’s hiring • Find out wh p of the and stay on to latest jobs engage • Connect and people with the right 8 9
  • Investment Banking explained Who’s who in an investment bank THE INS AND OUTS OF INVESTMENT BANKING JP Morgan, Credit Suisse, Goldman Sachs, RBA, In the structure of a typical investment bank, you’ll Investment banks are huge, multi-national want in on that trade. You will also need to keep Barclay’s. No doubt you are familiar with those find the roles are broken down into three categories, corporations, so they need an army of employees up on the markets and know what’s going on in staples of the investment banking landscape if or places within the bank: the front office, middle to keep the business going. In its simplest form, the world at all times including political, social and you are at all interested in the world of finance. an investment bank’s employees are broken down economic issues. Many salespeople write daily You may be thinking that a career in investment into three categories: front office, middle office roundups about their thoughts on certain markets banking would be the ideal move for you. But do The main difference between an investment and back office. Though there are a lot of different and events and spend lots of time on the phone you know what investment banks actually do? It’s bank and a commercial bank is that a roles within each category, these broad divisions as well. There are many salespeople out there, but not a straightforward thing to explain, but let’s commercial bank takes deposits. They have will give you clues as to whether a certain position the successful ones maintain strong relationships start by stating that it’s not investing, nor banking. nothing to do with, for example, bond or is client-facing, deals with internal policies or with their clients by suggesting creative and Investment banking is really the raising of capital stock markets like investment banks do and is tasked with making sure the bank’s image is lucrative trades that neither the client, nor (money companies need to help their business grow) the deposits are the way that they raise maintained in the media. competing salespeople have thought of. on behalf of clients by buying and selling securities funds. Think of a commercial bank as a kind (something that represents a monetary value, of broker, providing loans and different such as a stock or bond). They are not like retail or types of accounts for individuals and “They need an army of employees to As the fictional Gordon Gekko said to Bud commercial banks because they do not take deposits companies. An investment bank plays with in Wall Street: “No, no, no, no you don’t from individuals. longer investments to try to make money. keep the business going.” understand. I wanna be surprised. Astonish me pal. New info – I don’t care where or how you get it – just get it.” Gordon’s spot “It’s not a straightforward thing to on but a word of valuable advice: don’t do explain, but let’s start by stating that it’s office, and back office. The front office is really the The front office is the face of the investment bank anything illegal to get that precious info! face of the bank, they are the ones that have the or fund. They meet with current and potential not investing, nor banking.” most interaction with clients and actually perform clients, execute the trades that make money and the transactions. The middle office watches over determine the direction of the company. The roles the front office, making sure that they are not taking considered part of the front office include: Traders: Companies that have turned into the investment too much risk with the bank’s capital and that all Traders, of course, make the trades based on banks we know today began by offering services regulatory rules and compliance procedures are Sales: the orders from the salespeople and clients. But called merchant banking. Sometimes this name is followed. The middle office also includes HR and Salespeople are responsible for speaking to traders don’t just do what they are told by the still used, but today people are more likely to call it some other support roles. The back office handles their various clients, suggesting trades for them salespeople! A trader’s main aim is to keep the corporate finance. These are services investment the tasks of making sure the numbers are correct on and communicating orders to the trading desk. investment bank liquid (make sure that assets are banks offer to helps companies raise capital so that all trades, as well as IT and assistant duties. In these Salespeople can deal with individuals, companies, not tied up and can be sold easily with minimal they can improve their business. This can mean pages we’ll break down this large industry to help you investment funds and even hedge funds. All of loss. The most liquid asset is cash), so they will advising a company on buying another company, better understand how it all fits together, what the their clients are called the “buy side” because also perform trades where they make some profit orchestrating an IPO or brokering a merger between different divisions actually do, what daily life is like they are the ones buying the securities. The on the spread. This means that they will buy two companies. In an investment bank today, the should you become an investment banker and how investment banks themselves are considered the (bid) a security at one price and sell (ask) it for a sales and trading of other instruments such as bonds, to ace your interview. “sell side” because they are the ones that are higher price, keeping the gain from the bid-ask foreign exchange and commodities are lumped selling investments. Sales people need to be able differential. Obviously traders need to be good in with corporate finance under the umbrella of But do you know what a derivative is? Or what a to multi-task and listen to various conversations with numbers and be able to do quick calculations investment banking, though traditionalists would spot price means? Or how you go about valuing a at once. For example, if your traders are talking in their head. Though many traders focus only on consider them slightly separate. But because banks company? If any of those questions intrigues you, about a great deal or something in which they one or a small section of markets (for example have a commercial branch and an investment banking then you are ready to delve into the wild world of have a great price, you need to be paying gold or cocoa) they nonetheless need to be able branch, sales and trading sit in the investment investment banking. attention to that conversation while at the same to multitask and pay attention to the tiny numbers banking side and have started to become grouped time thinking about which of your clients might changing on several screens at once. Traders also together with the merchant banking activities.10 11
  • THE INS AND OUTS OF INVESTMENT BANKING need to have the ability to make hard decisions MDs: negatively affecting the bank overall. The middle Compliance: very fast – if it looks like a trade may be costing The managing directors of the bank are the head office is comprised of: Another important role in the middle office is money, but you’re not sure whether or not to honchos but usually have worked their way compliance. This should not be overlooked as get out of it, a few minutes’ indecision could see up through the bank. Their main job involves Risk management: investment banks are now being scrutinised more millions wiped off your book. If you are trading in maintaining relationships, networking and trying The biggest part of the middle office is probably than ever; making sure every trade is done by the international markets, be aware that you may be to impress potential clients. the risk management team. These people make book is just as important as making money. in for some long days and also have to trade from sure that the traders are not taking too much risk home in the middle of the night in a market on the Corporate financiers: and that they’re not doing things like leaving their The back office consists of all of those nitty-gritty other side of the world. Corporate finance sits a bit apart from the other positions exposed overnight. Risk people also have roles that keep the place running smoothly. sales/trading divisions of the bank. They are not the ability to cap how much traders can actually This includes: trading and making markets, but rather helping trade, if they feel that they are taking on too much companies with certain financial situations. They risk. Employees in the risk department must not Operations: “The managing directors of the bank act as a broker or consultant when companies only be good with numbers but must also have the The operations people are the ones who check are the head honchos but usually have need to raise capital, are looking to merge or buy guts to stand up to traders who are being careless over every trade to make sure the numbers are another company or want to issue debt – all of with their books. correct and the trading desk has bought or sold worked their way up through the bank.” which may enhance the value of their company. This can include helping to manage investments or even suggesting a mergers and acquisitions Research/Analyst: (M&A) strategy. In this instance, the corporate Here are two cautionary tales of rogue traders causing major damage. They underline the This is also considered a front office function. finance people at the investment bank will help importance of controls, risk management and effective oversight. Basically, researchers research! They read tons the M&A deals go through. Corporate financiers of data, articles, and anything else they can get must not only know what’s going on in the Barings Bank: in 1995 London’s oldest merchant bank collapsed because of Nick Leeson, who their hands on to help salespeople and traders finance world, but also have clear philosophies on was head of derivatives in their Singapore office. Leeson was meant to be arbitraging (meaning make good calls about the markets. They also use investing, stocks and how to value companies. You buying a futures contract on one market and selling it at a slightly higher price on another their data to suggest trades and help guide the can use your creativity here by listening to what market almost immediately and making a small profit on the difference)futures contracts from direction of the investment bank by constructing your client wants to achieve and then suggesting the Nikkei 225 index which were listed on the Osaka Securities Exchange in Japan and the financial models. Analysts in the corporate finance interesting and potentially groundbreaking ways Singapore International Monetary Exchange in Singapore. But Leeson decided to hold onto his department help with IPOs, specifically gathering they can go about making their thoughts a reality. futures contracts instead of selling immediately because he was convinced that the Japanese the information for pitchbooks. Though not as Yes, the corporate finance team gets a lot of the market would strengthen and make him more money. When he was proved wrong he decided to client-facing as sales and trading, the research glory and while salaries can go sky high, you’ll start forging documents, for example saying that a £200 million loss was actually a £102 million staff can be involved in client meetings from time have to work hard for it. gain. In the end he lost the bank £827 million, more than they had and there was no way to to time. Analysts do have contact with all positions recover. Part of the problem was that Leeson was the trading floor manager and in charge of in the bank and often work closely with managing Investor relations (funds only): settlement operations, so when he began forging trade documents, no one saw. In the end he directors. The MDs main job is to cultivate various IR staff are responsible for PR as well as keeping blamed the fact that no one at the bank could see how this arrangement could spell disaster and relationships with clients so they do not have all investors and shareholders abreast on what’s that people were too scared of looking foolish to do so and those that did think something was time to know everything they need to know for going on in the bank. Regular work can consist of up were ignored. a specific meeting or IPO pitch, and that’s when putting together reports and setting up meetings the analysts come in. MDs and associates depend and events for potential investors. IR work can In 2008 it emerged that trader Jerome Kerviel at French bank Societe Generale, was forging fake on the researchers to provide them with the also be unpredictable and involve lots of crisis index futures trades. Soc Gen has claimed that all of these rogue trades totaled 49.9 billion euro, information they need to make successful deals management. Markets move very fast and this way more than Kerviel was authorised to handle. When the bank eventually uncovered these and approach the right kinds of clients. They may can impact funds positively and negatively and the illegal trades, they decided to get out of those positions immediately. Closing out those trades not get much of the glory, and may be involved investor relations team needs to make sure that cost the bank 4.9 billion euro. Though Kerviel claims that what he did was practiced regularly by in several all-nighters, but it’s a fact that an they can answer any potentially uncomfortable other traders, and some people think there must have been people helping him with the fraud investment bank would cease to run without the questions that may arise. instead of working alone, Soc Gen maintains that every few days before these positions would research department. have triggered an automatic warning from the trading system, Kerviel would close out the trades Like the name suggests, the middle office bridges and move them so that no one would find out. On the occasions that he was questioned, he the gap between the front and back offices. These would say that the trade was a mistake, cancel it and then create another trade with a different are the kinds of roles that look into what is going instrument to replace it. But because it was in another form, no one noticed. It would have taken on in the front office and makes sure it’s not a very eagle-eyed risk manager to have avoided this disaster. 12 13
  • WHAT IS CORPORATE FINANCE? CORPORATE FINANCE what they were supposed to (if the trade was to buy USD but instead the ticket says selling On 6 May, 2010, the Dow Jones Industrial USD, well then, you’ve got a problem). They also Average suddenly plummeted 1,000 points. constantly reconcile trades and open balances People struggled to figure out what could with banks and other financial institutions. These cause such a sudden, massive drop. One are the editors and the proofreaders who make theory was that someone had purposely sure the execution is flawless. This is another or inadvertently added a few extra zeros role that may be overlooked by people on the to a trade order to sell shares. After that Within an investment bank, the corporate with manufacturing companies, so once you are outside, but any investment banker knows that some companies’ shares actually ended up finance team acts as a financial advisor for on a team, it is your job to know that industry a bad operations team can cause unnecessary trading at a penny! There was a 20 minute large companies, corporations and even some inside and out so as to be able to advise your headaches and completely mess up a profitable, window when prices went haywire and all governments. When a corporation wants to grow clients with expert knowledge. Keeping tabs on well-working team. For an operations role you’ll of those trades ended up being cancelled. the value of their company they will approach industry news and moves by other companies in need to be comfortable working on a variety of There are all kinds of conspiracy theories the corporate finance team at an investment the sector are important as well, so that when it IT systems or at least learning them quickly. Of as to the role of computers and electronic bank to firstly, suggest ideas about how to reach comes to actually guiding an IPO, you price shares course, an eye for detail is extremely important trading platforms in arguably the weirdest their goals, and may also ask them to actually appropriately that will make the deal a success. as is good listening skills. If a trader asks you to day the Dow has seen so far. help broker the deal(s). Most of the time a check something urgently, they will be very upset corporate finance team will suggest a merger or if they have to repeat it. The operations team the purchasing of a company or part of a company also communicates, usually by phone, with other if the client wants to expand their business and “Forget 9-5 or even 7-7, your hours are operations teams as well as salespeople at the Investment bankers are also always looking for increase profit. If the client wants to raise funds set by your clients and not the opening other banks who are doing business with them, so easier and faster trading and content management they might suggest an IPO (Initial Public Offering, you’ll need a good rapport with people, especially systems so it’s up to the IT staff to suggest also known as “floating”) – issuing stock – or and closing of markets.” when lots of money is on the line. possibilities and implement them. Traders are also advise issuing other securities such as debt. now increasingly set up to work from home so They may also bring up things like joint ventures, that they can trade out of office hours, another long-term investments, merger and acquisition Corporate finance is one of the most demanding “The paycheck usually makes all that thing IT will have to look after. No one can do possibilities, debt restructuring or management areas of investment banking. Forget 9-5 or even their job if the system goes down, something buy-outs (or buy-ins). The different suggestions 7-7, your hours are set by your clients and not hard work worth it.” investment bankers will not tolerate, so the IT staff may come about through financial modelling or the opening and closing of markets. But for all of need to be proactive in systems upkeep as well as simply a deep understanding of that particular those hours and hard work, you will be rewarded. suggesting cutting-edge technology that will give industry/experience within that industry. Analysts are expected to crunch numbers and IT: the investment bank a clear edge over know about the clients, competitors and other Another increasingly important role in an the competition. potential clients in the industry. Associates are investment bank that is considered part of the “Once you are on a team, it is your job still responsible for data, but also have account back office is the IT department. No longer just Investment banks deal with a wide range of management duties so are client-facing. Managers fixing desktops that are slow, IT departments in financial instruments and clients, and therefore to know that industry inside and out so and VPs leave the details up to the analysts and investment banks are now in charge of complex have tons of different roles to fill. The work is are mostly concerned with keeping clients happy, computer networks, trading platforms, and high-pressure and days can be extremely long, as to be able to advise your clients with fostering new relationships with potential clients communications systems. They may also be tasked but it can also be satisfying, interesting and expert knowledge.” and general networking to keep the bank in the with developing bespoke software to facilitate the paycheck usually makes all that hard know about industry moves. There are many the bank’s trades and content management. And work worth it. different roles within corporate finance but all are not only the upkeep is important, but also the Even within the corporate finance division challenging, interesting and can be very lucrative. security of those systems as well. If any sensitive there are lots of teams, each one handling a information gets out, it could spell real trouble for different way that the client can implement their the bank. Nowadays practically all trading is done financial plan for the future. One team may electronically and sensitive information is also only deal with IPOs, one team may only deal kept electronically.14 15
  • WHO’s WHO IN CORPORATE FINANCE? CORPORATE FINANCE nighters to get it all done). But banks will have finance – your regular leaving time might be some nice perks that can make the many long around midnight and you’ll probably have to work nights slightly more bearable such as free food weekends regularly at first, then possibly around and complementary taxis home in addition to 10 hours on weekends once you’ve had a few the standard perks of free or heavily subsidised years as an associate. Here you don’t necessarily gym memberships, dry cleaning services and free have to be a maths wiz to shine, but as long as you tickets to concerts and sporting events. You’ll possess general business knowledge, The whole corporate finance section is split up that happens), or you could be asked to use a work very long hours and might not get much of business sense and an overall grasp of the into deal teams and within those teams are the complicated mathematical algorithm dealing with the glory, but you will be an integral part markets and your clients, you can really stand different roles. Though one team may only be risk, credit or interest rates. If you are an analyst, of your team. out as an associate. concerned with M&A and another might only spreadsheets will become your best friends. work with the oil industry, their structure is Vice Presidents basically the same. “As long as you possess general As you may have guessed, VPs are on the next “Banks will have some nice perks such rung of the ladder. They oversee the analysts Analysts business knowledge, business sense and associates and while they still keep an eye First you have the analysts. They are at the as free food and complementary taxis and an overall grasp of the markets and on the modelling, meet with the analyst and bottom of the ladder and unfortunately, that’s associates to go over work and make any changes most likely where you’ll have to start. Analysts do home in addition to the standard perks.” your clients, you can really stand out as to models or presentation, they really don’t do a lot of the not-so-fun work that is necessary for any themselves. They do, however, oversee the transactions to go through. As an analyst you’ll an associate.” pitches because one of the main responsibilities find yourself evaluating financial statements If you are into maths, you may love being an of the VPs is client management. These are the as well as reviewing things like management analyst; or you may only be using the position people who spend time with most of the clients structure. You may also have to value a company as a way to move up. Either way, you will be Associates and so will be in lots of meetings and disappear based on similar companies in the same industry worked hard as an analyst. A VP or director Associates are higher up in the pecking order for many working lunches and dinners. VPs get and see how your client measures up. might have a hunch about a certain deal, but it than analysts, but sometimes not by much. They paid more, have more responsibility, but also is you who will provide the data to either back might handle the more complicated models, travel a lot visiting clients, so they are sometimes up or disprove his (unfortunately it usually is a but they generally oversee and hand out work barely in the office. They regularly are called out “First you have the analysts. They his) theory. This means that you are on a short to the analysts as well as concern themselves to client sites on a moment’s notice so planning lead and cannot get anything wrong. Before with the pitches to the clients for whatever deals a work week or even a weekend at home can are at the bottom of the ladder and you submit any work make sure it is double and the team thinks are best. This takes the form of be difficult and nearly impossible. They are also triple checked for errors as well as grammar pitchbooks and generally associates work with probably the ones who represent the company unfortunately, that’s most likely where mistakes. Traditionally analysts work long and analysts to create these. The pitchbooks are used at various conferences and industry gatherings, you’ll have to start.” varied hours. If no deals are going on the office to gain new clients and usually for each potential trying to gain new business and network. Yes, might be quiet and you’ll simply have to keep client, the associates and analysts create two: a the grunt work is over by this point and you’re up on the news or maybe work on a new model general pitchbook outlining the bank and what the probably getting paid quite a bit, but you may After analysis comes the financial modelling you’ve been discussing with colleagues. But then corporate finance division has accomplished, and not have much time to spend your money or see that will tell the team if a proposed deal is a it can seem like everything happens at once and then a more specific one that contains particular your family as often as you’d like. good idea or not and from there you’ll draw you’ll have so much work that leaving the office models aimed at exactly what this client wants your conclusions as to what the best strategy after midnight will become a regular occurrence. to achieve. So though associates still have to do a Directors/Managing Directors is – does the client need to raise more cash? You could be working on a pitchbook for an bit of the grunt work of the analysts, they do also This is where all that financial modelling pays off! Should they be purchasing a competitor or is it IPO one day, then handling the models for a get face time with clients, which can be a nice MDs sit at the top of the corporate finance food better to let a competitor purchase them? You proposed merger the next, then making changes change. This also means that while you need to chain so they pretty much get to do what they might already know what DCF Analysis is, and to the pitchbook, then doing some last-minute be technical, you also need good soft skills and want. They are in the office only when they want that is an example of a financial model. There writing for a transaction on little notice. Analysts need to be able to meet and socialise with clients. to be and only visit the clients that they want to are many other kinds of models and which ones are expected to work fast and provide the data An associate with an MBA might have a better – usually the most important clients are the ones you’ll use obviously depends on which team asked for without questions (since directors are work life than one without, as this can mean more the directors handle themselves. The directors’ you sit, but you could be tasked with looking at only concerned with selling the bank to clients, experience and thus more responsibility and more real job is to represent the team, make sure the balance sheets to predict a company’s future they will usually promise them multiple reports, leeway from the bosses. Expect long hours again, clients are happy and drum up as much new profits, thinking broadly about a company and models and presentations in a few days’ time, though not as long as when you were an analyst. business as they can. its situation (what if this happens or what if which means you might have to pull some all- This is simply a reality of working in corporate16 17
  • My 24 hours in corporate finance – CORPORATE FINANCE and its achievements, similar deals that the bank has done to highlight their expertise in the area, the projected value of the company based on an ipo other companies in the same industry that have issued shares and highlighting the bank’s place in a “league table” of other underwriters. “MDs and VPs from several banks are Though the deals within corporate finance can General pitching parading in and out of their offices, take on many different forms, a regular one is an Once a higher up in the corporate finance team this is generally referred to as the IPO. IPO stands for Initial Public Offering (if you hears that a company might be considering an IPO, hear a company is “floating” or considering a they will go back to their analysts and associates “beauty contest”.” “flotation” or an “offering”, they are considering and have them put together a pitchbook. The first an IPO) and this is when a company decides to pitchbook usually assembled is a general one that issue stock, primarily to raise funds. The corporate outlines key points about the bank and highlights The actual pitch finance team in an investment bank comes in by any successes that the corporate finance team It’s probably annoying for the analyst and arranging the deal and taking some of the risk. have had. Obviously this is the “pitch” to the associates that work so hard on the pitchbooks You may have heard of the term underwriting - company to use this bank as their IPO manager. (the VPs and MDs also work on them, but not researching other similar companies or making this is what the investment bank does in an IPO, Then the higher-ups will try to schedule at least as much as the analyst and associates do) that site visits to the company’s different plants, offices they advise the company releasing their shares a few follow-up meetings in the hopes that they they don’t get to make the actual pitch, but or factories. The idea is to get a sense of output, and then they take on some of the risk involved are one of the investment banks hired to manage that’s how it goes! An MD and a VP and maybe growth, health and general direction so that the in actually being able to sell those securities. IPOs the deal. And usually there is more than one bank a stock analyst, who will deal with the shares performance of the company in the short term, as can make up a large amount of what corporate working on one public offering so being on good once they are issued, will be the ones to give the well as long term, can be assessed. finance teams do so it’s important to know exactly terms with corporate finance teams from other presentation to the company to try to persuade what goes into one and what the timeline of a banks is important too. One bank will usually take them to use their bank as an underwriter. Because Drafting deal looks like. the lead on an IPO (the manager), but there may at this point in the deal, MDs and VPs from several The prospectus is the basic marketing tool used to be another or even two other banks in charge of banks are parading in and out of their offices, this get people to invest, or buy the stock that will be Hear it through the grapevine specific areas of the deal. is generally referred to as the “beauty contest”. issued. The prospectus is put together, or drafted, When a company wants to issue shares – because after the due diligence is finished and is the most they may want to raise money without borrowing Second pitchbook with more detail You’ve won! Now the real work starts labour intensive step after the second pitchbook. - many times the information leaks out and Then after some initial contact, the corporate Once your team has been named as the manager The first draft of the prospectus is written by then different investment banks rush to pitch finance team will produce their second pitchbook. of the IPO, next you have to get together with the issuing company’s lawyers, then gets passed their services to that company. This is where the This pitchbook is much more detailed and will the other participants who will be helping out around from team to team as different drafts of relationships that the directors and VPs cultivate use financial modelling to get the data needed. with the deal. This list usually includes: the the document are made. The more teams that come in. If they have a great network of people This is a lot of work, much more so than the first main players of the company itself like the CEO, are involved in the deal, the longer the drafting they know in the business, they are more likely pitchbook – you might want to bring a pillow and CFO and any important department heads; the stage as everyone has different ideas about the to be the first to know that a company is thinking a toothbrush to work cause you’ll probably be accountants for the company; the company’s tone, the style, what should be included and about an IPO. The directors get paid the giant spending a night or two in the office. A reason lawyers; the lead manager; any co-managers and what should be left out. There are mega drafting sums to basically keep up on what everyone in the second pitchbook may be very complicated lawyers or council for the underwriters. sessions where the various teams meet to discuss the industry is doing and to keep relationships is if this specific company has never previously Then the due diligence begins. Before the stock the prospectus and those meetings can even going. It may seem like all they ever do is go out to issued stock and therefore there is no data is issued, there needs to be a lot of research involve some analysts and associates on occasion. dinner with clients and potential clients, but this to present! If there is no history of what will undertaken to make sure the timeline and the Usually this stage takes up to 10 weeks and most will be how the bank finds out about upcoming happen, how much money they will be able to price the stock is issued at is correct so as to make times ends up at an all night financial printing deals and how companies will think of your bank raise, etc. the analysts and associates must do a the deal a success. The first step in this research company to get it completed on time. first when they want to do a deal. lot of comparable analysis, and that takes time. is to speak at length with the management of the And this isn’t just a case of agreeing on the words These pitchbooks will probably have the following company as well as to get to know that company and then hitting “print”. Usually for an IPO you information: general information about the bank and the industry inside and out. This could mean might need as many as 20,000 copies of the18 19
  • AN INSIDE LOOK AT preliminary prospectus (called the red herring, weeks of hotel rooms and airplanes. And at a road or red for short) and 10,000 copies of the final show, the associate’s role unfortunately amounts version! These financial printers are set up so to little more than babysitting and making sure that the teams that oversee the final draft of the everyone has their luggage and hasn’t left their prospectuses can work uninterrupted for two passport at home. days in a row if needed. They get food delivered to them whenever they want and there are even Is the price is right? showers on site – great for not smelling, bad for Part of putting the prospectuses together means taking away excuses to leave. pricing the stock that will be offered. Usually a range will be set by the underwriting team while Getting the word out doing the due diligence. Hopefully the team have At this point the prospectus is finalised, printed got it right and the stock ends up trading at the and has been sent to as many potential investors high end of the range. The best case scenario is a as the team can think of. Now you need to follow stock that trades above the top of the range and up to get the greatest number of investors on that happens when there is a lot of buzz behind board as possible. Both the VP and MD of the the stock and it becomes a very sought-after lead manager and the management of the issuing investment. Conversely, if no one cares about 2013 EDITION company will come up with a presentation to your new stock then it may trade below your show to as many potential investors as they can. predictions, which is not good. Other marketing materials are constructed by Then when the stock is issued it’s up to everyone analysts and associates such as “selling memos” to watch how it performs, some may go up and other documents that salespeople will use to slightly while others may look healthy on the day entice their clients into investing. the stock is issued and then drop on day two. This part of the whole process is sometimes called the “road show” because the company’s Hopefully the due diligence and marketing phases have worked together to create a good product DownloaD our guiDe: management, along with the representatives from the managing corporate finance team, will that is well publicised. an insiDe look at investment banking employers sometimes make hundreds of presentations in loads of different cities. It can basically mean Find out whether a career in investment banking is the right one for you. In this guide you will find: • 1,000s of reviews from current employees and interns • Employer specific interview advice • In-depth company profiles and salary info Get the latest Buzz on: Check online to hear what employees have to say about: barclays j.p. morgan rbs • Life on the Job • Hours, pay and perks banco santanDer macquarie group rothschilD • Applications and interviews • And more... bnp paribas morgan stanley ubs golDman sachs nomura ...anD much more! WWW.INSIDEBUZZ.CO.UK20
  • WHAT are equities? SALES AND TRADING – 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 profitable. 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 The equities desk in an investment bank deals The London Stock Exchange US economy. All of the companies on this index with company stock (called shares in Europe). This exchange has been in existence since 1801 are public and also trade on the New York Stock Depending on where you are, you will have to but buying shares stared as early as the 1680. Exchange and the NASDAQ. Since 1957 the index follow the various indices around the world such This came out of the need to raise money for two has been published by Standard & Poor’s, which as the FTSE, NASDAQ, Dow, CAC and the DAX. Not maritime trading voyages, one to China and one actually publish many different indices. only will you have to pay attention to the numbers to India. It is thought that by 1695 there were – which stocks have gone down and which are up 140 companies whose shares were being sold The CAC – but you will have to learn about how companies and traded. The motto on the coat of arms of the The CAC 40 is a French stock index of the 40 are valued. You’ll have to form opinions on how exchange translates to: “My word is my bond”. French companies on the Euronext Paris Exchange companies become overvalued and undervalued, (formerly the Paris Bourse) with the highest The Nikkei good investment strategies for those looking to market capitalisation. Market capitalisation, or This is a price-weighted index from Japan. A price invest in stocks and how certain social and political market cap, is when you determine how much an weighted index means that the percentage of the events can affect companies’ share price. “You’ll have to form opinions on how entire company is worth based on its share price. index made up of a particular stock depends on companies become overvalued and So if the share price is x, you multiply that by all of the stock price. So the higher the stock value, the What is a stock market? the shares that have been bought by shareholders, larger the portion of the index it will make up. A stock market is an auction where stocks are undervalued and how certain social and in theory giving you the value of the entire This is different from a market-weighted index traded; stocks are traded on a stock exchange. political events can affect companies’ company. The CAC 40 includes companies such where the equity market value (value of the share Traditionally the stock exchange is an actual as L’Oreal, BNP Paribas and AXA but market cap is times number of shares outstanding – shares that location where people, banks and hedge funds share price.” calculated regularly and companies may drop out are out in the market and have been purchased) call in their orders and then the order is placed. of the CAC 40 if their market cap falls. Though the determines how big a percentage the company Examples of stock exchanges are: the New York companies are French, many of the stockholders gets. The Nikkei was started in 1950 by the Nihon Stock Exchange, the Frankfurt Stock Exchange and What is an index? are international and come from Britain, Japan, Keizai Shimbun newspaper and is reviewed yearly. the London Stock Exchange. Nowadays there are The indices listed below are a way to keep track Germany and the US. Because many of those also virtual stock exchanges where everything is of various stocks and whether their stock price companies listed are multinational, the CAC 40 What makes stocks move? done over computers. The NASDAQ is an example is moving up or down. An index will only track has a very international feel and affects other Many changes in a country’s economic situation, of a virtual stock exchange. a certain part of a stock exchange. For example, international markets too. to a specific company announcing that their CEO the FTSE 100 only tracks 100 companies but it is is stepping down (Google Steve Jobs and Apple), The NASDAQ considered a great indicator at the overall health can affect stock price. Perhaps the biggest trigger This stands for National Association of Securities of the British economy. “The FTSE 100 – First you’ll have to for a stock moving is interest rates. The consumer Dealers Automated Quotations and though it is price index tracks the price of everyday goods and US-based, is completely virtual and electronic. The FTSE 100 know how to pronounce it!” if those prices rise, people fear inflation. When Started in 1971, it came out of over-the-counter First you’ll have to know how to pronounce it there is inflation it means that money is not as trading model, which means there is no physical (footsie) then you’ll need to know that it stands valuable anymore because it takes more of it exchange to go through, all orders are processed for the Financial Times Stock Exchange 100. It was The DAX to buy things than before. That also means that by computers and can be completed from started in 1984 jointly by the newspaper and the The Dax, or the Deutscher Aktien IndeX, has interest rates rise to compensate. All of this means anywhere. Besides being ahead of its time by London Stock Exchange (which has now turned been around since 1988 and lists the 30 biggest investors look to more low-risk moves, such as using computer systems to buy and sell stocks, it into the FTSE Group, which is an independent companies trading on the Frankfurt Stock bonds, as opposed to trading stock. was also the first exchange where people could go company all together) to list blue chip (or large Exchange. Each quarter they review the list of online to trade stocks. cap) companies appearing on the exchange. So companies named on the index and make any People also constantly look at the GDP of a many instruments are based on the FTSE and it is appropriate changes so the largest companies are country to get an idea of the overall economic broadly regarded as a way to determine the health always represented on the index. Again, this is a health. If GDP slows down then a recession may of the UK economy. great general benchmark for the German economy. not be far behind. In a recession everything slows22 23
  • my 24 hours in equities SALES AND TRADING – EQUITIES down and demand for companies’ products suffer. as you are paying more for those earnings per The companies’ profits will shrink and that will share. If two companies have the same EPS but cause their stock price to plummet. one has a higher P/E ratio, that one is a more expensive of the two and means you are paying If you’re tracking an individual company you need more for the same EPS. Often the P/E ratio as Annelies Vermeulen, Equity Research Analyst to pay attention to the earning per share (EPS). expressed by saying that a company is trading at BOX Companies release this figure quarterly 20 times its earnings if it has a P/E ratio of 20. (Joined J.P. Morgan in June 2009) and it not only tells you about the health of a company, but whether its stock is overvalued PEG ratio or undervalued. If analysts have predicted a This stands for Price/Earnings to Growth ratio and company’s EPS at one price, but the actual price takes the P/E ratio and then accounts for how fast is lower, the price of that stock will fall as people the EPS for the company will grow. A stock that look to sell of a stock that is in worse health than is growing rapidly will have a higher PEG ratio. A I work in the European Equity Research team here talk to one of our salespeople first if they have they thought. If the opposite happens and the stock that is well priced will have the same P/E at J.P. Morgan, which is divided up by industry. questions on a stock, but if they have more EPS comes in higher than expected, that ratio and PEG ratio. So if a company’s P/E ratio is I work in the Property team, with whom I did specific questions about the company, then they stock will rally. 20 and its PEG ratio is also 20 some might argue my summer internship whilst at university. Our talk to analysts like us. that the stock is too expensive if another company job involves analysing the companies we cover, How stocks are measured and valued with the same EPS has a lower P/E ratio, but that publishing reports and advising clients. We We also publish a huge, 400-page annual report You can’t just go on the price you see on your also means that it’s growing faster because the look at all aspects of the industry and all types in September – the Property Handbook. This gives screen. People have developed hundreds of PEG rate is 20. of property, including house prices, shopping a more fundamental analysis of the property different ratios to value stocks and compare them. centres, offices and residential, as well as market, as well as highlighting our “top picks” for These are the most valuable ones you need to EPS, or Earnings Per Share, will tell you how much transactions made by the big property companies. the year. These are the stocks we would advise our know if you want to work in equities: each share of a company will earn. It’s probably clients to invest in. the most important thing to look at when deciding I usually get in between 6.30 and 7.00am, P/E ratio to invest in a company. The most basic formula depending on how busy we are. For each of the stocks we cover, we give either a This stands for Price to Earnings and simply is the to calculate EPS is profit divided by a weighted The first couple of hours are spent looking at buy, hold or sell recommendation, which clients price of the share divided by the Earnings Per number of outstanding shares. It’s important to the newsflow and putting together our ‘Daily’ look at when deciding whether or not to invest. Share (EPS). This will tell you the price of the stock use a weighted number as the actual number of research report, which is sent out to clients at We upgrade/downgrade stocks periodically related to the earnings of the company. So if a shares bought can change often. around 9.00am. This includes updates on what depending on where we think the share price is stock has a high P/E ratio that means it’s expensive happened in the market the day before, any going to go. When speaking to clients, we always newsflow from the industry such as acquisitions or explain the reasons for our recommendation, disposals (buying or selling properties or property which are a combination of many different factors. developments) made by one of our stocks, as well as transactions or deals across the wider sector. We also regularly attend property tours and My team covers around 45 European Real Estate site visits of our companies’ assets and new stocks, which also all regularly report earnings developments. For instance, one of the companies results. We include results commentary in our we cover recently acquired The Trafford Centre in Daily, such as whether results are in line, above or Manchester, and organised a trip for analysts and below expectations. investors to see the shopping centre. Around 9.00am we get breakfast. Then the rest of Usually I go home around 6.00 or 7.00pm. the day is very varied – if one of our companies Occasionally though, when we’re working on a big has reported results then we’ll spend the day sector report it can be later. Generally, I would say updating the models, sending out alerts, going that my days are very varied - it is hard work but to meetings, speaking to salespeople and traders we have a lot of fun too. as well as calling clients. Clients will sometimes24 25
  • WHAT IS FIXED INCOME? SALES AND TRADING – FIXED INCOME Derivatives Derivatives are tricky. We’re used to seeing Imagine your local bookseller, instead of something, it’s got a price tag, and that’s how requiring you to pay £10 for the book in much it’s worth. But a derivative’s value changes four weeks’ time, says to you, “If you come based on a host of different factors. Here are the to me in four weeks I’ll sell you the book basic ones to learn: at £10 but you are not obliged to buy the book from me” (Your local bookseller is, of Fixed income is an instrument that you as an • Municipal: These are regularly called “munis”. • Forward: A forward contract means that course, unlikely to give you this option for investment banker can use to make a profit for They are bonds that are issued by the local someone agrees to buy something from free. If anybody offers you a free option you you and your clients. The name fixed income government or a city. Munis are also considered someone else at a future date for a fixed price should generally take it…). In this case you explains exactly what it is: debt securities that quite a safe investment, as cities rarely default – got that? So say that you want to buy a car, would buy the book from the bookseller pay an amount of income at fixed intervals over a (but again, never say never...). You will mostly but you don’t want to buy it for another year. in four weeks’ time only if the price for the certain length of time. There are many different hear talk of munis in relation to the US but a The car dealership agrees to sell you the car you book at all other booksellers were greater kinds of fixed income deals you could make and UK muni market does exist and there are also want in exactly one year for £20,000. Well, in than £10. In other words you would exercise each work in a different way. Here are the basic operating muni markets in Sweden and a year’s time the value of the car could go up your option only if it were valuable for you fixed income products that make up the desk. the Netherlands. or down, depending on a lot of things. So if the to do so. But even prior to exercise, your value goes up, the dealership still has to sell you option has a value. That value is made of two Bonds • Corporate: These are issued by a company the car for £20,000 and that means that you components: inherent value (the amount by This is the biggie in the fixed income market. The just like they would issue stock (but don’t get have made a profit, while they have lost money. which the market price of the book at that most basic definition of a bond is a kind of loan. confused – a stock is a share in the company time exceeds the £10 price tag you and the If a company issues bonds and you buy one, you and a bond is a debt security). Issuing bonds • Option: Instead of a forward, you can buy an bookseller have agreed) and time value. are basically loaning them money. In exchange, is a great way for a company to raise money if option. So, if in a year’s time the value of the car they will pay you interest on a fixed schedule they are looking to expand or for things is only £18,000, but you still have that forward for the length of the loan, or bond. When the like new offices. saying you have to pay £20,000, the option bond expires, the company will also pay back the gives you the option to opt out of the deal. That loan and that interest is floating, meaning that it original amount of the bond, or the principal. Another important aspect of the bond market is £20,000 is also called the strike price, or the changes. If the directors of that company decide Bonds are great for people who feel comfortable the ratings. Standard & Poor’s, Moody’s, and Fitch price that the contract will be carried out for, if they don’t like being exposed that way, they can investing in something that they know will Ratings are the credit rating agencies you need the deal happens. swap their payments with another company pay them quarterly, annually, or whenever to familiarise yourself with. Bonds are rated on a whose interest rate payments are fixed. So is stipulated. scale from AAA (the best ones, most likely to meet Company A pays Company B their floating rate payments) to D (a greater chance of default which “Investment banking isn’t just “buy low, and Company B pays Company A their fixed Bonds are issued by lots of different places; here means you’ll lose your money). The agencies label rate. Swaps can be structured in a number of are the ones you need to know about: their levels slightly differently, but in general the sell high”.” ways, but this is the most basic. Coming back bonds that have a rating of at least BBB are most to fixed income, this is another way that a • Government: Government issued bonds are likely complete payments. Anything with a rating particular party can ensure that they are getting considered one of the most stable investments lower than that is considered a high-yield bond, • Interest Rate Swap: If you find the finance world a payment at a fixed interval. you can make. Actually, there are three kinds more commonly is known as a junk bond (also interesting, you’ll love the idea behind interest of securities to go for: Treasury bills (or T-bills), called “high-yield” or “speculative” bonds when rate swaps. Basically, this allows you to swap So as you can see, investment banking isn’t just which mature for up to two years; Treasury you want to be a little more tactful about it). Well, one cash flow for another. There are a lot of “buy low, sell high”. Fixed income is a useful notes, that go on from three to 10 years; and the name alone should tell you all about those! reasons for someone to do this, but let’s say market to understand, and an essential tool in the Treasury bonds, which last from 10-30 years. Of Yes, they can be high yield, but they are so risky that there’s a company that pays interest on a investment banking world. course these are seen as stable because really, that there is a big chance the issuer will default is the government going to default? Well, in and that that means you don’t get your money. 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 affected by interest rates, so they’re not totally without risk.26 27
  • WHAT IS FOREIGN EXCHANGE? SALES AND TRADING – FOREIGN EXCHANGE usually is settled in two days. It’s the most rate. If it were, we’d hope that all you Brits would simple kind of trade as you literally trade x for y be too busy living the good life somewhere in and that’s it. America to be reading this!). In these quotations it’s always “how many of the counter currency Forward make up one of the base currency.” We’ve covered forwards in the chapter on fixed income, but this can play a part in the FX market What affects exchange rates? FX, or forex, stands for foreign exchange. Every themselves out in the markets and makes it easier too. An exchange rate is agreed but the deal The first thing that can make the value of a bank has an FX desk but it’s more important for countries to deal with any ups and downs the doesn’t actually take place until a pre-determined currency rise and fall is something to do with to some banks than others. Forex trades are currency may face. The UK, US and the Eurozone date in the future. that country’s political system. This can mean all over-the-counter – this means that there is all have floating exchange rates. anything from elections, to some kind of scandal no centralised body or place where things are Future involving government officials to a new president/ regulated and traded. The trades take place FX desks have a separate group for Emerging Again, part of fixed income but also can be used prime minister/ruling party. Any new party that directly between two parties with no exchange Markets FX. These are currencies from countries in trading foreign exchange. It’s like a forward but is expected to radically change policies or throw house in the middle. Every country has its own that are experiencing tremendous growth. more standardised and regulated. the country into any kind of instability will have central bank where currency is controlled, but They were formerly known as less developed or a negative effect on the country’s currency and it there is not one global body that oversees the Third World countries but now those terms are will weaken. This will also be the case should there currency market. FX is also interesting since now outdated. These countries, such as China, “You’ll be happy to hear that markets be questions about who will actually lead the anyone can get involved – from someone day Brazil, South Africa and India, are seen as having country or who is in charge. trading from home for fun, to global institutions tremendous upside and potential for investment, are closed during weekends.” making a deal ahead of an international purchase, but at the same time carrying a lot of risk. The state of a country’s economy will also affect to hedge funds speculating in more than one the strength of that country’s currency. Any time currency, the forex markets are open to everyone. Many large, multi-national corporations that Option a report comes out about a country’s GDP, budget are not necessarily in the finance sector may This is another fixed income instrument used in FX deficit or surplus, or a change in economic policy, actually have their own trading division to help where you put a trade in place but then have the you will see the currency of that country move. with their international business. For example, option to back out of it before the date where the Of course the nature of the announcement will “Knowing how to trade currencies a large construction firm may employ their own trade would be done. You have the right, but not determine which way the currency goes, but any doesn’t necessarily mean that you’ll forex traders so that they can handle converting the obligation to go ahead with the trade until the change or announcement having to do with the one currency into another when there is a piece contract expires. fiscal state of a country will affect its currency. only be able to find work at a bank of equipment they need to purchase overseas. or fund.” So FX can actually reach into many different kinds Swap Traders themselves can also influence forex of business and knowing how to trade currencies An FX swap is when a trade is done but then markets. If enough traders perceive one currency doesn’t necessarily mean that you’ll only be able reversed later. So you buy x, sell y and then in to be on the decline, they might pull their to find work at a bank or fund. But besides those three months you sell x back for y. A swap is investment in that and invest in another currency Some countries decide that they want more kinds of situations, the main hubs for FX markets usually achieved by making a spot trade and also a that they think is more stable. That will make the control over the value of their currency and so are: London, New York, Singapore, Hong Kong forward at the same time. demand for that second currency higher, but the they have what is called pegged or fixed exchange and Tokyo. At one bank there will be FX traders first one will suffer, all because of perception. This rates. Such countries include: Venezuela, the spread out all over the world so that all time zones How to quote an exchange rate is what’s called market psychology and is a very Bahamas and the city-state of Hong Kong. Their are covered and the desk can take advantage of Every currency in the world has a three letter interesting component of the FX markets – trying central bank ensures that their currency is directly moves that may happen when only one market is code. For the euro it is EUR, the code for the to figure out what people will do when an event correlated to something else, whether that is open. This is a true 24-hour business, and trading pound is GBP, the US dollar is USD. To quote an occurs. Successfully predicting this is an important gold or another major currency. It is helpful for can take place any time of the day or night (only exchange rate between two currencies, one code skill possessed by outstanding traders. controlling inflation and also used by smaller on weekdays; you’ll be happy to hear that markets will be listed directly after the other, usually as: countries to ease trade, since their currency are closed during weekends). GBP/USD. In this example we’d call GBP the base is directly related to a major world currency currency and USD the counter currency. After the or instrument. Most countries, though, have a Different kinds of FX trades two currency codes there will be a number, for floating exchange rate, and that rate is dictated There are different ways of trading foreign example 5. If you saw GBP/USD 5 that means that by the markets. Some economists think this way exchange and the most common are the following: 5 USD = 1GBP (we just used nice round numbers is more helpful as it allows currencies to work Spot – This is the shortest kind of trade that for this example, it’s not actually the current28 29
  • my 24 hours in foreign exchange SALES AND TRADING – FOREIGN EXCHANGE Actually executing a trade can happen in a number of ways. You can do a deal over the phone, or probably more likely you’ll do it electronically. If you’re looking to get into finance, familiarise yourself with Bloomberg. Before Michael Bloomberg became mayor of New York City, he created a company that not only specialises in market information, but also an important trading platform. Everyone on the trading desk (and in sales for that matter) has a Bloomberg terminal, where they can chat to other traders and salespeople, see market numbers and execute trades. A typical day goes from 7am to 7pm and Talking to traders is another important part of Many people execute trades over Bloomberg chat (which is just like IM). Some will do deals over sometimes days can last longer than that, my day. Since they execute orders from me and the phone and then confirm the details over Bloomberg chat afterwards. There are other trading depending on what’s going on. A former FX my clients it’s important to know what they see/ platforms and e-market platforms too where people can execute a trade. Doing a trade via some salesperson described their typical day as what they are thinking and always have a good kind of electronic platform is getting more and more commonplace, and over the phone deals consisting of the following tasks: relationship with them. Sometimes traders and are becoming a thing of the past. salespeople can have their differences but not The first thing I do when I get in to work is read always; one of my best friends is a trader. summaries of what happened overnight and after I left the office the day before. These come that day and try to predict what is going to I always end the day with more calls to from news outlets and other colleagues in the “Bloomberg News is on constantly so happen as a result. Again, this is something customers. As a salesperson you can’t be afraid business, either from my bank or others. extra that not every salesperson does but it to pick up the phone and talk markets and you’ll that we can see what’s going on minute- can really add value for your customers and soon realise that talking to customers is really to-minute.” help you understand the market better. If your the number one duty of a salesperson. Then I take the most important points from predictions are proven right, your credibility everything I’ve read and write my own summary will skyrocket but more than that it’s going that of what’s going on and what I think will be extra mile to make sure you’re prepared and if important for the day(s) ahead. The distribution Again, I do another round of calls with you enjoy the markets you won’t mind doing it. list for my morning summaries is long as I make customers, especially if something important sure that everyone knows what I’m thinking in has happened since I’ve been in the office. case they want to do a trade. Sometimes they call me and ask me to look at specific things and may ask my opinion on some After my summary I get on the phone, which is issue and then ask me to come up with trades a very important part of being a salesperson. for that. This is where my creativity comes in Some of my customers always want to be called and what makes a salesperson truly good at in the morning to discuss what has happened their job. The trick is to come up with trades no overnight and my general thoughts, others one has thought of yet so that your customers might call or email me to discuss anything know that they are getting value out of your they’ve found interesting in my morning update. relationship and not just the same old ideas they could get anywhere. At this point in the day I usually end up doing “You’ll soon realise that talking to trades so I will be communicating with clients as customers is really the number one duty well as with the trading desk. of a salesperson.” By this time the US market is open and it’s not unusual for something important to have happened. In that case I’ll call the appropriate Then I make sure to keep reading news customers again to discuss and hopefully do a headlines. Bloomberg News is on constantly few more trades. so that we can see what’s going on minute-to- minute. The markets move fast so you can never Hopefully it’s a little quiet by this time so I take ignore the news for too long. that chance to think about what has happened30 31
  • What are commodities? SALES AND TRADING – COMMODITIES you also don’t have the exchange to back you Options if the other side decides they want out of the Options are also a popular contract in contract. But it does mean that you can call off commodities. This is a contract similar to a the trade too if it becomes clear that it will no future except that each side has to option not longer be in your interest. 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 Sometimes investment banking can seem price for the good and the seller will transfer “If there is a major drought in the contract ends. Analysts often work on complex abstract - you have to pay attention to how the that good to the buyer immediately. More models to try to predict how values will move “market” reacts to events or you are betting often, though, commodities deals are done American mid-west, how will that affect and if an option will be profitable or not as on which way interest rates will go. You’re not as forward or futures contracts. A forward or corn prices?” trying to determine volatility is an important trading real things you can touch and hold, and future is when a contract is written up that part of commodities trading. sometimes that can be hard to wrap your brain states that a good will be sold in the future for around. But one section of an investment bank an already determined amount of money. So if Commodities trades don’t work in a bubble that does away with all that is commodities. a company that makes soy milk needs to buy Another difference between a future and and you’ll have to pay attention not only to soya beans to make their product, the soya forward contract is that forwards, because they the product you are trading but also things bean farmer may say that his crop will not be are less formal, are set up so that the entire like weather (if there is a major drought in the ready for another five months, but they will order is settled at the agreed upon forward American mid-west, how will that affect corn “If you work in commodities you could enter into a futures contract where they agree date. But futures contracts can actually be prices?), the environment/advances in alternate be selling sugar to Cadbury.” the amount that the soy milk company will pay settled over more than one date and also at energies and how many worldwide products the farmer and they pay it now. The company daily marked-to-market rates. This means that include things like copper. You’ll also need to likes this because if the price of soya beans rises the fair value of the commodity is calculated at think practically - if you buy a large amount of in those five months, they won’t have to pay the end of each day, no matter what rates the oil, where are you going to store it? - which can What is a commodity? anything extra as they’ve already locked in the commodity was trading at throughout the day. make for a very interesting career. Commodities are products or goods with a price. The farmer also benefits from a futures uniform quality and price across the market. contract because if the price of soya beans goes These can range from everyday items such as down, he won’t suffer a hit as he has already coffee, cocoa or cotton to other goods that negotiated his price. may or may not be part of your daily life such as gold, oil and coal. Generally all commodities are grouped as either hard commodities - ones “You’re not trading real things you can that are extracted, such as minerals - or soft commodities - ones that are cultivated by man. touch and hold, and sometimes that can Commodities trading can be fascinating and can cover a range of products and issues such be hard to wrap your brain around.” as agriculture, energy and precious metals. If you work in commodities you could be selling sugar to Cadbury or buying copper on behalf of What’s the difference between a future Check online to hear what a manufacturing giant. It may not get the press and forward? employees have to say about: that the bond market or corporate finance does, Though a future and forward is basically but it is just as rewarding and challenging. the same thing, they cannot be used • Life on the Job interchangeably. A future is more regulated • Hours, pay and perks How are commodities traded? than a forward. Futures contracts go through • Applications and interviews Commodities are traded on commodities the exchange so they are very strict and there is • And more... exchanges, so that the goods can be regulated. no way either party can get out of or default on When a trade is made, there is a contract the contract. A forward is less formal and more produced that details the trade. Sometimes of a personal agreement between the buyer WWW.INSIDEBUZZ.CO.UK a commodities trade can be for spot price, and the seller. Though you don’t have to go meaning that the buyer agrees to a certain through the exchange, which can be beneficial,32 33
  • Buy-side vs. Sell-side: what are WHAT YOU ALSO NEED TO KNOW large fees up front from investors and sometimes • Portfolio Managers: even more so than other buy-side institutions. Sometimes also called fund managers, these are To put it bluntly, only the very rich are allowed to the people who actually invest the clients’ money they, what the heck is a hedge fund invest in hedge funds because the initial required investment is usually ridiculously high. Hedge funds can also short – sell a borrowed asset, and make the decisions on what will be bought on their behalf. They can encompass the actual traders on the desk or the people who simply and which role is right for you? are also less regulated than other investment management firms and they also tend to perform leveraged investments where, say a hedge fund come up with the strategies. They also do a bit of client account management, making sure the clients are kept up-to-date on their portfolios. buys 1 billion usd worth of stock only using 100mm usd of actual money, the remainder • Investor Relations: being provided by bank loans – something other The IR department does any PR for the firm, types of funds are not allowed to do. If a deal like seeks out potential new investors, and keeps The world of investment banking is full of jargon, The variety of the buy-side that is successful, the hedge fund can actually current investors in the know about what you’re unique words, and exclusive phrases, and you HAVE Since so many different kinds of companies come make more that their initial investment, an asset doing with their money. It can be a varied role, to become fluent in this special language if this under the umbrella that is the buy-side, let’s take management fund cannot. with tasks ranging from event organisation to is a world you’re looking to inhabit. Two of these a closer look at a few and identify how they’re report preparation to damage control (hopefully essential I-banking phrases you need to know, different from each other. not on a regular basis!). whether you’re aiming for the front office, middle “Investment banks also have very office or back office, are “buy-side” and “sell-side” • Investment/asset management firms: • Operations: and the difference between the two. These firms manage a portfolio of stocks, structured training programs (some These are the unsung heroes of the firm. They bonds, real estate – anything – for the investor. taking place abroad, which is pretty are the technical people who are good with The buy-side Again, an asset management firm can have a numbers and can spot that mistake in the trade The buy-side is made up of the clients of the variety of clients, ranging from pension funds cool as they will pay for you to do your order that no one else did. Operations, or back investment bank, which covers lots of different to companies to individuals. An investment training someplace like Hong Kong).” office roles, can range from IT positions to risk types of companies, organisations, and everything manager (sometimes called a fund manager) analysts to the people who make sure the trades in between. They could be individuals, private devises an investment strategy for the client and are settled correctly and on time. companies, pension funds, asset management keeps them updated regularly with reports and funds, proprietary trading desks (prop desks,) analysis. Investment management funds are part What are the specific roles that make up the Who’s who on the sell-side? hedge funds or mutual funds. They are the ones of the buy-side because they buy the different buy-side? On the sell-side, you have similar jobs as the buy- buying the securities, hoping for high returns on products from investment banks to maximise Since the buy-side organisations are usually less side, but the roles are much more uniform from their investments, and that’s why they are called their portfolios. Generally these kinds of firms structured than investment banks on the sell-side, bank to bank. Investment banks also have very the buy-side. deal with longer-term investments. these roles can vary greatly and a role at one firm structured training programs (some taking place or hedge fund can be totally different from the abroad, which is pretty cool as they will pay for you • Asset management divisions of investment role with the exact same title at the investment to do your training someplace like Hong Kong) that “You HAVE to become fluent in this banks: management division of a bank. But generally, buy- last for a few months where you try out different Investment banks also have their own asset side funds are made up of: roles and see which one fits you best. special language if this is a world you’re management divisions. This is usually where looking to inhabit.” government entities and multi-national • Analysts: • Research: corporations turn to manage their investments This is how a lot of people start off in the Again, you would be tasked with researching a and various portfolios. investment management world. Analysts will specific sector, product, or location and would The sell-side usually be given a sector, region, or even a be expected to know everything about that topic The sell-side is the investment bank itself. The • Hedge funds specific company to research, gather information and supply reports to more senior analysts with investment bank is the one selling the securities Hedge funds follow the same basic idea – on, and run investment models about. As an recommendations. Many people start out as and investment ideas, so it’s easy to remember that investing clients’ money, hoping to increase that analyst, you will be expected to know literally analysts and move up after they have a few years they are the sell-side. People on the sell-side direct investment – but are a slightly different beast. everything about that topic and will be called under their belt. their clients to securities which they think are in Hedge funds are more specialised as some are set upon to recommend investment strategies. It the clients’ best interest, and which can generate a up to only arbitrage, some focus on the general can mean analysing something as broad as fixed profit for themselves too. macro-economic situations of the world and they income or something as specific as the Argentine can vary greatly in size. Hedge funds also take real estate market.34 35
  • WHAT YOU ALSO NEED TO KNOW • Trading: • Pay: want to become a trader at an investment bank, • Career advancement: During the training program, it will become clear Traditionally, working at a place like a hedge colleagues will have access to your books to see This depends greatly on your institution. who will make a good trader and who will not. fund will get you a better salary (all those client whether you’ve been smart with your trades, or Normally, it has been easier for people to If you’re good with numbers and can manage fees). But now after the economic crisis, the pay lost heaps of cash. Salespeople at investment advance at smaller funds than at large investment risk well, then you may start out as a junior on scale on the buy-side and sell-side is starting to banks have targets they have to hit and those can banks. At a smaller fund it may also be easier to the trading desk, moving up depending on how even out. Of course both sides compensate their be brutal measures of worth to the bank. move into another department, if you find you’d much money you make. There are traders in employees with good basic salaries and bonuses. like to take your career into a slightly different all departments of an investment bank trading Perhaps the main difference in pay is that • Hours: direction. But that doesn’t mean that there’s foreign exchange, gold, or bonds, just to investment banks will generally pay part of the Hours can be insane on both sides, but this nowhere to go at an investment bank. If you name a few. annual bonus in stock of the bank and investment depends greatly on where you’re working. get an interview on either the buy-side or the management firms pay their entire bonuses in Traditionally, employees at investment banks sell-side, make sure you enquire about this, as it • Sales: cash. Those shares typically don’t vest (become have longer hours and they can be LONG. If you really depends from place to place. You also have to be good with numbers to be a yours) for a few years (for example, they could have to trade with a country on the other side successful salesperson, but you really have to offer you a certain amount of stock, which defers of the world you’re getting into the office at a Only you can tell whether investment banking or be a people person with great problem solving over three years so each year only a third of that ridiculous hour, waking up in the middle of the investment management is right for you. Don’t skills. As a salesperson it’s your responsibility to stock becomes yours) so if you’re thinking of night to trade, or having a fun little sleepover believe every stereotype you hear about the buy- sell unique products to your clients that will make leaving your investment banking job before then, at your desk. Depending on which markets side or the sell-side, as there are so many different them money and also suggest exciting, creative you’ll have to find a new company that will buy you’re working in, you have to be in the office kinds of institutions, really everything is a variable. trades with lots of upside that no one else has out your stock as part of your new employment when everything kicks off and those times can As long as you go with the job that suits you best, thought of yet – not a role for the shrinking agreement, or you’ll just have to walk away vary. Because this is now a truly global world, there are no wrong choices. violet! Targets for sell-side salespeople can from it; definitely a point to think about if you’re there is a market open somewhere at all hours sometimes be very stressful, but generally the debating whether to join the buy or sell-side. so the possibility of working round the clock is bank won’t fix you an unattainable target. If you’re planning on staying at one particular real. Working at a place like a hedge fund can investment bank for the long haul, this might mean more normal working hours, but it doesn’t • Other: not matter to you. But if you want flexibility exempt you from early starts, long days, and There is a lot that investment banks do. You could and an easier time if things turn pear-shaped, trades and decisions from home. potentially end up helping on transactions such then this will not help. Traditionally, investment as IPOs and M&A deals. When choosing which management firms have not done this, but some investment bank to target for a job, look into are starting to consider it too. the different departments and see if they have a specialty, maybe that is something you find interesting and you know that would be a great “Investment banks will generally pay bank for you. part of the annual bonus in stock of the Buy-side or sell-side – which one is right for you? bank and investment management firms Since presumably you are reading this because you are considering a finance career, let’s compare both pay their entire bonuses in cash.” of these in terms of the job. • Structure: • Stress: Investment banks don’t take deposits, so they use If you don’t already know that stress is an their own capital and that of investors to make a integral part of any finance job, then you have profit. This means that by and large if the trades a lot to learn about the sector. Working in any don’t make money, oops... By contrast hedge type of financial organisation means that you funds charge their investors a high fee no matter will be stressed out. Even if you work at an asset what. So if you’re a fund manager and you don’t management firm, though you will have those make you clients money on a single investment, client fees to fall back on, if you don’t make your hedge fund will still make money and you the clients money they will not be pleased and will still get paid, pretty sweet, huh? could redeem, a.k.a. pull their money out of your fund, and that is bad. If you decide you36 37
  • Investment Banking vs. Investment WHAT YOU ALSO NEED TO KNOW a few years (for example, they could offer you smart with your trades, or lost heaps of cash. a certain amount of stock, which defers over Salespeople at investment banks have targets they three years so each year only a third of that stock have to hit and those can be brutal measures of Management: what’s the difference becomes yours) so if you’re thinking of leaving your investment banking job before then, you’ll have to find a new company that will buy out your worth to the bank. Hours and which one is right for you? stock as part of your new employment agreement, or you’ll just have to walk away from it; definitely a point to think about if you’re debating whether Hours can be insane on both sides, but this depends greatly on where you’re working. Traditionally, employees at investment banks have to join the buy or sell-side. longer hours and they can be LONG. If you have to trade with a country on the other side of the world you’re getting into the office at a ridiculous So you know you want to work in finance, but Since presumably you are reading this because “If you don’t already know that stress hour, waking up in the middle of the night to where? The sooner you know how all of the you are considering a finance career, let’s compare trade, or having a fun little sleepover at your desk. different places in the investment world link both of these in terms of the job. is an integral part of any finance job, Depending on which markets you’re working in, up, the quicker you’ll be able to picture which then you have a lot to learn about the you have to be in the office when everything kicks kind of job will suit you best. Here we’ll look at Structure off and those times can vary. Because this is now investment banking (the sell-side) and investment Investment banks don’t take deposits, so they use sector.” a truly global world, there is a market somewhere management (the buy-side), how they’re their own capital and that of investors to make a open at all hours so the possibility of working different, and how they work together to profit. This means that by and large if the trades round the clock is real. Working at a place like a achieve their goals. don’t make money, oops... By contrast investment There’s also been a change in pay structure hedge fund can mean more normal working hours, management firms, such as hedge funds, charge because of the impact of the financial crisis and but it doesn’t exempt you from early starts, long Investment banks are institutions that raise their investors a fee no matter what. So if you’re in response to the public outcry over those “fat days, and trades and decisions from home. capital on behalf of their clients. They can make an investment manager and you don’t make you cat bankers”. Many investment banks are making this money by doing anything from foreign clients money on a single investment, your firm some of their bonus payments deferred, usually Career advancement exchange trades, where those exchange rates will still make money and you will still get paid, for three years. This means that it will be three This depends greatly on your institution. Normally, make them a profit, to interest rate swaps to pretty sweet, huh? whole years until you get the full bonus amount! it has been easier for people to advance at purchasing stocks and bonds, or helping to If you’re planning on staying at one particular smaller funds than at large investment banks. At facilitate M&A deals. Clients of investment banks investment bank for the long haul, this might a smaller fund it may also be easier to move into can be wealthy individuals, companies, pension “Because this is now a truly global not matter to you. But if you want flexibility another department, if you find you’d like to take funds, corporations, mutual funds, governments, and an easier time if things turn pear-shaped, your career into a slightly different direction. But proprietary desks (prop desks), or hedge funds. world, there is a market somewhere then this will not help. Traditionally, investment that doesn’t mean that there’s nowhere to go at Investment banks are called the “sell-side” open at all hours so the possibility of management firms have not done this, but some an investment bank. If you get an interview on because they come up with investment ideas for are starting to consider it too. either the buy-side or the sell-side, make sure you their clients and sell them those trades. working round the clock is real.” enquire about this, as it really depends from Stress place to place. Investment management is when someone If you don’t already know that stress is an integral manages a portfolio of stocks, bonds, real estate Pay part of any finance job, then you have a lot to Only you can tell whether investment banking or – anything – for the investor. Again, an asset Traditionally, working at a place like a hedge fund learn about the sector. Working in either type investment management is right for you. Don’t management firm can have a variety of clients, will get you a better salary (all those client fees). of organisation means that you will be stressed believe every stereotype you hear about the buy- ranging from pension funds to companies to But now after the economic crisis, the pay scale on out. Even if you work at an asset management side or the sell-side, as there are so many different individuals. An investment manager devises an the buy-side and sell-side is starting to even out. firm, though you will have those client fees to kinds of institutions, really everything is a variable. investment strategy for the client and keeps them Of course both sides compensate their employees fall back on, if you don’t make the clients money As long as you go with the job that suits you best, updated regularly with reports and analysis. with good basic salaries and bonuses. Perhaps the they will not be pleased and could redeem, a.k.a. there are no wrong choices. Investment management funds are part of the main difference in pay is that investment banks pull their money out of your fund, and that is buy-side because they buy the different will generally pay part of the annual bonus in bad. If you decide you want to become a trader products from investment banks to maximise stock of the bank and investment management at an investment bank, colleagues will have their portfolios. firms pay their entire bonuses in cash. Those access to your books to see whether you’ve been shares typically don’t vest (become yours) for38 39
  • Tricky interview questions WHAT YOU ALSO NEED TO KNOW stock has a high P/E ratio that means it’s expensive importantly, make sure you can argue your point as you are paying more for those earnings per well and think about how to defend yourself if share. If two companies have the same EPS but your interviewer plays “devil’s advocate” to try one has a higher P/E ratio, that one is a more to rattle you. Also do this same exercise for a expensive of the two and means you are paying few companies you would short. You can more for the same EPS. Often the P/E ratio as never prepare enough of this specific kind of expressed by saying that a company is trading at information in preparation for an investment CORPORATE FINANCE/CORPORATE VALUATION price vs. earnings, EBITDA, stock price and 20 times its earnings if it has a P/E ratio of 20. management interview. any other variables you think would be an How do you value a company? indicator of the health of a company. What is a PEG ratio? Let’s discuss a company that you think is This is quite a broad question, so start with the This stands for Price/earnings to growth ratio and undervalued. Why is it undervalued? methods you would use and go through them one 3. Discounted Cash Flow Analysis takes the P/E ratio and then accounts for how fast Give me an example of a company you think is at a time. It will also impress if you discuss the This is when you use future cash flow, or the EPS for the company will grow. A stock that overvalued and why. pros and cons of each method. what the company will make in the future, is growing rapidly will have a higher PEG ratio. A It goes without saying: if you don’t read up on to determine what the company is worth stock that is well priced will have the same P/E the financial aspects of multinational companies, The main ways to value a company are: precedent now. To calculate DCF you need to work out ratio and PEG ratio. So if a company’s P/E ratio is the latest industry news or study any trends, then transactions analysis, comparable company what the projected or future cash flow is for 20 and its PEG ratio is also 20 some might argue you will not have a successful interview. Look analysis and discounted cash flow analysis. a company for the next 10 years. Then work that the stock is too expensive if another company into some companies and their stocks and then out how much that would be in today’s terms with the same EPS has a lower P/E ratio, but that decide whether you think they are overvalued 1. Precedent Transactions Analysis by “discounting” it at the rate that would give also means that it’s growing faster because the or undervalued. Write down why you think that This is when you look at how much others a return on investment. Then you add in the PEG rate is 20. along with facts to bolster your argument. Try have paid for similar companies to the one terminal value of the company and that will to memorise your points but it wouldn’t hurt to you are valuing to determine how much tell you how much the company is worth. Tell me about specific stocks you like have them with you so you can quickly refer to the company is worth. To use this method Though this is the preferred method to value The interviewer may ask you about individual them (avoid blatantly reading off the page). If you effectively you need to be extremely familiar a company, it still has its flaws because the stocks or companies and what you think of them. can pick out a company whose stock has gone with the industry of the company you are projected earning and discounted rate are They may also ask you to “pitch a stock”, which down based on some bad press, but you’re not valuing as well as the normal premiums paid figures that you set using your best guess, means you’ll have to pick a company you know of convinced that the bad press is really going to for such a company. This can be a relatively there’s no concrete maths equation to work and make a strong argument as to why investing affect the bottom line - that would be an example easy method to use since all the information it out so DCF does have a certain amount of in them is a good idea. It goes without saying: if of a company that you think is undervalued. is public and thus easy to obtain and also subjectivity to it. you are not up on the latest stock news, financial Obviously, go into as much detail as possible. since the past transactions actually happened, trends, and general business current events, you Any knowledge of the industry, history of specific you can be confident that analysis based on What’s a leveraged buyout? shouldn’t be in the interview in the first place. companies and any other knowledge you can this is extremely plausible. But on the other A leveraged buyout (LBO) is when a company display in your interview, the better. hand, what if the market during the past or investor buys another company using mostly Before your interview make sure to take a close transactions was extremely different from borrowed money, loans or even bonds to be able look at a few companies and their stocks, pick two present market conditions? Can you really to make the purchase. The assets of the company or three that you would buy. Write down brief FIXED INCOME base the value of one company on the value being acquired are usually used a collateral for bullet points as to why you would buy them (Are of another that is not exactly the same? those loans. Sometimes the ratio of debt to equity you impressed with their management? Have they What is duration/Macaulay duration/Modified These are some issues you should think about in an LBO can be 90-10. Any debt percentage successfully negotiated a tricky situation? Do their duration? before your interview so you can discuss them higher than that can lead to bankruptcy. financials look particularly healthy to you? Do Duration is a measure in years that not only at length with your interviewer. their institutional investors give you confidence?), measure how the bond will react to changing a bit about the company and also list some similar interest rates, but also how long it will take for the 2. Comparable Company Analysis EQUITIES companies that have done well so you can use fixed income payments to be made This is similar to Precedent Transactions them as favourable comparisons. Basically, you Analysis except you are using the whole What is a P/E ratio? need to know everything about these companies Macaulay’s Duration is a formula widely used company as a comparison unit, not the This stands for price to earnings and simply is the from why they’ve been in the news lately to to calculate duration and is named after the purchase of a company. So to use this method price of the share divided by the earnings per which market factors could affect them. Even man who came up with the formula, Frederick you would also seek out similar companies share (EPS). This will tell you the price of the stock go into detail about their cash flow statements Macaulay. This weighted formula has been around to the one you are valuing and look at their related to the earnings of the company. So if a so you know the company inside and out. Most since 1938 (if you are technically-minded and it is40 41
  • WHAT YOU ALSO NEED TO KNOW • Callable – sometimes also called a redeemable What is the Euro/Pound exchange rate today? has impacted the prices for metals used to make bond, this is when the bond has a call date, Where do you think it will be in one those gadgets (mention specifically palladium, or dates, when the issuer has the right, not year and why? cadmium, nickel and platinum). Also read up on the obligation to buy back the bond at a Obviously you need to keep up on the currency what oil is doing before your interview as this is pre-determined price. To compensate for the market at all times as it can change in a matter of sure to crop up in your discussion. Think about possibility of redeeming the bond before the minutes. Right before your interview check the the impact that an increased number of people maturity date, these bonds have higher coupons prices of the major currencies (GBP, EUR, USD, JPY, trading have and how as it’s easier for individuals (amount of interest paid to the investor). CHF), the ones that interest you the most and of and novices to trade, how has this affected the course, if the bank or firm tends to focus on one commodities market. market or area, make sure you know what those FX currencies are doing. As for the asset management portion of the question, simply think about how you would Define risk adjusted rate of returns? The part of the question that deals with what advise a client about investing in commodities and When looking at an investment you cannot simply you think about that exchange rate in the future what issues that client would face in doing so. Try look at the return that is projected. If the profit has to come from your views on the market. Be to tie in specific commodities such as gold. appropriate to the position you are interviewing from investment A is greater than the profit from prepared to give your opinion and then be able for, you may go into detail about the investment B you may immediately want to go to back it up with facts, historical evidence and What is the current price of gold, corn, actual formula). with investment A. But investment A might have corollary evidence. This is your opinion so really wheat, etc? a greater chance of a total loss than investment there is no wrong answer, but if you are unable to Right before your interview check Reuters, Modified duration only deals with the question B so even though the profit may be larger, it is a intelligently articulate why you hold the views that Bloomberg or another website or newspaper of price relative to fluctuating interest rates and lot riskier and therefore not necessarily a better you do, you will not have a successful interview. and jot down the price of major commodities does not go into the weighted average of time investment. Adjusted rate of return is when you from precious metals, other metals, food, energy until repayment. not only look at the return that an investment If the Yuan (CNY)/USD exchange rate is 100 and oil/fuel. Obviously if you know the role will may give you, but you also measure the risk of CNY/1 USD today and the one year forward rate focus on one of these categories, focus your What is convexity? that investment. The adjusted rate of return is is 105 CNY/1 USD, what does this imply? research there. This is a more accurate measure of the usually denoted as a number or rating. If you are Since in a year it will take more yuan to equal one relationship between yield and price changes in technically minded you may also want to mention dollar that implies that the yuan is weaker than Have you ever advised your client to invest in bonds in relation to the change in interest rates. the ways that risk is measured: beta, alpha, the the dollar. The dollar is stronger because it can a commodity market and the client has faced Duration calculates this as a straight line, when in Sharpe ratio, r-squared and standard deviation. buy more yuan in a year from now than today. losses after taking your suggestion? In such actuality it is a convex curve, hence the name. This situation how would you try to cover up the is used as a risk calculation because it can tell how Would a price of a call option go up or down losses of the client? a bond yield will respond to interest rate changes. when the maturity of the option is longer? COMMODITIES This will be a hard question to tackle if you have In an option, the price is pre-determined when the not had any previous experience in the industry. If Tell me about the different kinds of bonds. contract is written up. That is why an option is so What has fuelled the commodities boom of you have had work experience, definitely mention Here are a few different bonds you should attractive to both sides – the price is locked in so recent years and why? What are its implications that, even if you did not directly advise a client. know about: that if the price of the instrument in question goes for the asset management industry? If you have, be honest about the situation and • Plain Vanilla – the most simple kind of bond down, the seller is protected and if it goes up, the If you have had any work experience in what the result was. If you have never advised a where everything is spelled out at the start – a buyer will get a good deal. So the actual price of commodities, be sure to relate your work to client, say so, but then add that if you had advised fixed maturity/expiry date, when the principal is the option doesn’t change. Whether the market why you think there has been resurgence in a client, or if in the future you are advising a client due and how much and how often the rate for the particular instrument goes up or down commodities after a brief dip due to the credit and that client suffered a loss you would do x. interest is paid. depends on the market and can go either way no crisis. You don’t have to go into minute detail, Don’t say that client losses haven’t happened/ • Convertible – this can be converted into the matter how long the contract is for. Since a call but any real world experience you can point to won’t happen to you because you are that good! issuing company’s stock at a fixed price. Good option is to buy a futures contract (a put option will be a plus. Everyone experiences losses at some point in their for the buyer as it is a bond with an option to is to sell one) you would have to be confident financial career. What the interviewer is looking buy stock if they decide they want to invest that that the price would rise during the length of the Be sure to discuss the rise in emerging market for is how you deal with those difficult times. Of way. Good for the issuing company as it offsets contract to make the option profitable for you. populations and why this has had such a strong course clients will not be happy with a loss but the potentially negative reason they might issue impact on the demand of food commodities. how will you make it up to them? What new, stock in the first place. Discuss all of the electronics that everyone has creative investment have you been working on today (iPads, iPods, mobile phones) and how that that will make them back their money plus more?42 43
  • AN INSIDE LOOK AT Make sure you highlight how you have/would turn as well get used to the idea now that you’re a negative situation into a positive one (and make going to have to take some risk to be a successful sure you highlight your soft skills and your ease at investment manager. dealing with clients too). Since you have no previous experience in the markets, tell me why you want to work here BUY-SIDE/INVESTMENT MANAGEMENT/HEDGE and why are you interested in investment FUND QUESTIONS management? This is the most important question for those Why do you want to work on the buy-side and who have decided on a career change or for not the sell-side? those grads who are applying for their first job. Go back to the chapter on buy-side vs. sell-side They are not going to expect you to be familiar as that can help you start to form your argument. Maybe you were attracted to the buy-side because with detailed financial models or know advanced algorithms, but you will have to tell them why 2013 EDITION of the wide range of companies you could work you are interested in the markets, describe what for (such as hedge funds, asset management about following stocks and companies excites firms and mutual funds) or the various different you and highlight which of your qualities makes securities you could manage? Maybe you liked you best suited to work on the buy-side. People the structure or culture of most buy-side firms in the industry say that when they first got into DownloaD our guiDe: more than the sell-side? They may also ask you the business, their initial interviewers did not why you’re not pursuing work in consulting. This expect them to know the technical stuff, they only is something you’ll have to decide for yourself but really looked for people with strong personalities, an insiDe look at graDuate employers you must come up with a few points to make sure enthusiasm and drive – don’t underestimate the they know you’re not just going to jump ship to an power of those qualities. investment bank in a year’s time. If I introduce a risky stock into a portfolio, is that MISC/GENERAL Find out which career is the right one for you. good or bad? This is not a yes or no answer. One stock does What is an income statement? In this guide you will find: not a portfolio make; the health of a portfolio This is just a simple record of a company’s gains depends on all of its parts and how they work and losses, including expenses. The income • 1,000s of reviews from current employees and interns together, or are correlated. Generally stocks that sheet represents a specified amount of time and are negatively correlated make for a less risky includes everything from the cost of renting the • Company specific interview advice portfolio (so a petrol company and an airline office to the depreciation of assets. • In-depth employer profiles and salary info would be negatively correlated since when the price of petrol goes up, it’s good for the petrol What is a cash flow statement? company but bad for the airline as it makes their cost rise). A cash flow statement tracks the actual cash that goes in and out of a company. This is important to Get the latest Buzz on: see how liquid the company is. If it is rich in assets On a related note, to be a good investment but not necessarily cash, there could be problems. Boston Consulting group Hogan lovells nomura manager you’ll have to take some risk. If you convey in the interview that you are not comfortable taking any risk and probably would Explain to me what makes up a cash flow statement Capgemini JoHn lewis partnersHip slaugHter anD may not do so if hired, rather than convince them that The place to start when looking at a cash flow you are careful, this will convince them that you statement is the beginning cash balance. Then Deloitte J.p. morgan tHales won’t make any money for the company. The you must look at cash from operations, then the amount of risk you’re allowed and encouraged cash made from any investments, then cash from to take varies from place to place, but you may financing. All of that will make up the ending cash golDman saCHs kpmg ...anD muCH more!44
  • Interview Advice & Tips on WHAT YOU ALSO NEED TO KNOW your logic will be put to the test as well as your communicating your enthusiasm for the role analytical ability. over the phone. Furthermore, have a pen and paper to hand to note down anything of Getting Hired As mentioned earlier, the process can vary according to role – and there’s no better example of this than Citi. Those applying to operations, importance and make sure you prepare before answering the phone. technology and HR will have to pass a logical Assessment Day reasoning test if they hope to make it to interview; The majority of firms now include some form of whereas other business lines have to master the assessment centre in their application process. numeric test. With Barclays Capital, hopefuls begin The format not only differs from firm to firm, but The investment banking recruitment process expect a set of competency based questions. with an aptitude test designed to assess logical it can also differ within a company depending on is lengthy and is described as being anything These invariably include posers on your career reasoning; only on passing this will applicants sit the role. However, assessment centres typically from “very rigorous” at J.P. Morgan, to “relaxed” choice and academic background. The firms the verbal reasoning test. they follow the format used at BofA Merrill Lynch at Morgan Stanley, to both “very tough” and will also most likely test your knowledge of the and Citi: case study, interviews, tests, and group “rigorous” at Goldman Sachs. Candidates can industry – so make sure you stay abreast of From firm to firm, the tests will vary in length; but exercises. expect to face multiple rounds of interviews and current banking affairs. you can safely expect to be given a time frame are tested on a wide range of different skills. around the half hour mark. Do not be under any Take your time with your answers, and although illusion: if you don’t make the grade you won’t To even get a look in, you’ll most likely need it may sound obvious, make sure that you be invited through to next stage, no matter how “No firm’s procedure is alike, and a good 2:1 from a decent university – though actually answer the questions asked – it’s all too glowing your CV is. To alleviate the pressure on similarly each firm is susceptible to you’ll need to make that 1st if you are aiming easy to waffle on without getting to the point. yourself – make sure you find a quiet space and for Goldman Sachs and some of its closest Furthermore, be wary of grammar, syntax and don’t leave sitting it until the last minute. Do not different things.” competitors. The discipline of your degree is not sentence structure. be fooled, practice does make perfect. Practice important, although a background in finance, sample tests can be found online, so there’s no business or engineering is useful. More crucial Tests excuse for being unprepared! Practice free Some firms will throw the odd curveball into is that you have strong numerical skills in More often than not you will be asked to sit -online tests. their assessments. UBS for instance drops a your arsenal. online tests immediately following the submission presentation into the mix. Based on a case study, of your application. Your score will then join Phone Interviews with HR candidates will have to prepare a 10 minute your application form as a means to assess your The first hurdle many applicants face will be presentation within only 45 minutes. Even the “To even get a look in, you’ll most suitability for progression to the next round. If you a screening interview with a member of HR. best presenters should expect a bombardment of make it through to the interview stage, expect A number of firms incorporate this into their questions and criticism following their delivery. likely need a good 2:1 from a decent another similar test – set to ensure no cheating process, including Morgan Stanley, Barclays Capital Don’t take it personally though – listen to the university.” has occurred. and BNP Paribas. Typically these are held over the comments and argue constructively and concisely. phone and last around 40 minutes. Tests will take the form of both numerical and Applications Candidates are normally asked a set list of verbal reasoning examination. While these might Graduate recruitment varies by region, by role “If you don’t make the grade you won’t questions and will need to explain their motivation not be too difficult, like the online tests, you’ll still and by scheme, yet you’ll be hard pushed to find be invited through to next stage, no for applying to that particular role and that need to both practice and prepare. a bank that doesn’t use an online application particular company. A favourite at Barclays Capital form as the first appraisal process during hiring. matter how glowing your CV is.” for instance, is to ask candidates about recent Group exercises will see candidates placed in There are exceptions; Deutsche Bank and Citi examples of the company being in the news. With teams ranging from two to eight. The standard is for instance allow its applicants to attach a this in mind, it’s important to stay abreast on a business related scenario and a time frame to CV, covering letter, references and a record of Typically, investment banks will ask candidates current banking affairs and make sure you know discuss it in. Groups are monitored closely, with academic history. But on the whole banking to sit both numeracy and non-verbal tests. The your CV inside and out. firms looking for those that strike the balance of applicants have to make their case in the former will unsurprisingly be maths based, being heard and leaving others room to put their framework set out in the firms’ forms. but some firms, such as UBS will also include Phone interviews are no walk in the park. The points across. Remember, balance is key. questions to test your logical ability. Citi goes a lack of face to face contact can make it harder to After decanting your personal details and step further, with psychological tests comprising communicate and gauge what the employer is Sometimes assessment centres are broken down academic history from your CV into the form, the earlier stage of its recruitment process. Again, thinking. The key is to focus and concentrate on in to two stages. At J.P. Morgan for example,46 47
  • ANALYSING FINANCIAL STATEMENTS candidates sit a test, have two interviews, attend a mixer on one day and then if successful, attend a second day where they give a presentation and Goldman Sachs, a manager says, “the usual interview topics include candidate’s motivation for becoming a banker at the firm, their technical ANALYsING FINANCIAL STATEMENTS face more interviews. Similarly Morgan Stanley skills and cultural fit.” has a two day assessment centre. Questions in the interview will vary depending Interviews on the company, the interview stage and the Understanding financial statements (or accounts) Equity reveals the net worth of a company: this The style and number of interviews varies interviewer themselves. Usually they will be either and how they interplay is fundamental to any job in equals the assets that the company owns less the from firm to firm. Initially competency based, competency-based or technical, but it’s best to investment banking. debts they owe to creditors. Equity can also be interviews will grill you on your leadership, prepare for every eventuality. Think about the defined as the claims that investors have on the creativity and teamwork. They’ll be the standard, reasons for the choices you have made – both Most likely, during the interview you won’t be company’s resources. ‘tell me a time when…’ questions, and the ‘why academic and extracurricular – and make sure asked to perform a detailed accounting analysis of this firm/industry/division?’ posers. Later on your knowledge of the firm and the industry a company but any bank you apply to will expect In a nutshell, the Balance Sheet represents the the process, interviews will be chiefly technical, is up to date. you to be able to review, interpret and comment on economic resources of a company, including the although expect a sprinkling of competencies here financial statements. claims that creditors and equity holders have on and there. Interviews can represent the bulk of No firm’s procedure is alike, and similarly each those resources. the process, as is the case with Deutsche Bank, or firm is susceptible to different things. At Nomura, The trick to succeeding is first to understand the they can be the culmination of an assessment day, for instance, personality is said to be as important data you’re being asked to analyse and secondly to When looking at a balance sheet it’s also important e.g. BofA Merrill Lynch . as ability; while Morgan Stanley are reputedly be able to link it back to the question that was given to understand that companies can obtain resources, especially receptive to enthusiastic candidates. to you by the interviewer. (e.g. cash), from both creditors and investors, and At BNP Paribas, candidates face between three One of the firm’s associates said “they tried to why the two are different. Debts from creditors and five interviews in what is described as a see what I was most interested in, capable of and Financial statements, put simply, represent all are classified as a Liability, whereas equity from “collaborative process”, whereby the firm only whether I was good fit.” Lazard looks for original the relevant financial information of a company, investors are classified as Equity. makes an offer with the mutual agreement ideas and a passion for business, and an associate presented in a structured manner and in a form of all interviewers. at J.P. Morgan said that their firm places “a strong easy to understand. There are four basic financial Companies incur debts from creditors to, for emphasis on communication skills.” statements that provide the information needed to example, purchase resources necessary to run their Elsewhere, Rothschild follows up a preliminary evaluate a company. They include: businesses and promise to pay that debt back over a individual interview with a panel interview. The trick is to do your homework. Quite simply, specified period of time, regardless of the operating J.P. Morgan reviews and tests its candidates in give the firm what they want, whilst also being • The Balance Sheet performance of the company. Companies also multiple rounds, with candidates facing interviews yourself and letting your best strengths • The Income Statement look to investors to acquire economic resources. by members of different business areas. At shine through. • The Statements of Retained Earnings However, companies don’t promise to pay investors • The Statements of Cash Flows back a specified amount over a specified period of time. Instead, companies promise investors a Here’s a closer look at each: return on their investment often contingent on the operating performance of the company. Since an 1) The Balance Sheet equity holder’s investment is not guaranteed, it is The Balance Sheet presents the financial position of more risky that a loan made by a creditor. Debts a company at a given point in time. owed to creditors are more “senior” than the It includes three sections: Assets, Liabilities and investments of equity holders and are classified as Equity. Liabilities, while equity investments are accounted for in the Equity section of the Balance Sheet. Assets are the economic resources that the company uses to run its business. They include Cash, Inventory and Equipment. 2) The Income Statement In addition to incurring debt and seeking new Liabilities presents the debts of the company. investors, a company can also obtain the resources Liabilities represent what the company owes, in necessary to operate its business through its own other words, the claims that creditors have on the operations. The Income Statement presents the company’s resources.48 49
  • ABCs OF INVESTMENT BANKING ABCs OF INVESTMENT BANKING results of operations of a business over a specified 3) The Statement of Retained Earnings period of time, (e.g. one month, one quarter, one This statement explains the changes in a company’s year), and includes 3 elements: Revenues, Expenses retained earnings over a specific reporting period. and Net Income. Retained earnings represent the portion of net income which is retained by the company rather than Revenue is the amount of money that a company distributed to its owners (as dividends). Conversely, receives during a specific period. It is the “top if the company takes a loss, then that loss is retained line” or “gross income” figure from which costs and called variously retained losses. ACCRUED INTEREST Chinese Wall are subtracted to determine net income. Revenue A method used in accounting where the interest This is a theoretical wall that exists in financial is generally calculated by multiplying the price at The Statement of Retained Earnings doesn’t provide either interest you have to pay or interest you are institutions to keep departments that may create which goods or services are sold by the number of any new information not already reflected in other owed is recorded but has not yet been received or a conflict of interest separate. For example, the units or amount sold within a time period. financial statements. But it does provide information paid. corporate advisory team that helps companies on what management is doing with the company’s navigate takeovers will be kept separate from Expenses are the opposite of revenue. Expenses earnings. Management may be re-investing some or Arbitrage salespeople who try to get their clients to invest in are the costs incurred by a business over a specified all of the company’s net income into the business, Using the price difference of one or two similar company shares so that no insider trading can take period of time to generate the revenues earned distributing some or all of its income to shareholders instruments to make a profit by buying and selling place. Recently there has been a movement to during that same period of time. For example, in (in the form of dividends). that instrument simultaneously. re-name the term so some people call it a firewall order for Buzz Snowboards to sell snowboards, it or cone of silence. must buy all the materials needed (wood, plastic, Asset Management aluminium, paint, etc.) to make snowboards. Buzz 4) The Statement of Cash Flows Managing the investment portfolio of a client. This Bond Snowboard must also pay employees to both make The Statement of Cash Flows shows how changes in is done either by a specialist financial company or Similar to a loan, the bond is an IOU issued by and sell the product and operate the business. These balance sheet accounts and income affect cash and an investment bank. a company or government in return for money are examples of expenses that a company can incur cash equivalents. Essentially, the cash flow statement provided by investors (bondholders). The issuing in order to operate. is concerned with the flow of cash in and cash out of Balance Sheet company pays interest on a fixed schedule to the the business and is a useful in determining the short- Highlights one point in time to show a company’s bondholder and then pays back the principal at So, when is a purchase considered an asset, and term viability of a company, particularly its ability to overall financial health. The three basic parts the maturity date. One of many methods of raising when is it considered an expense? pay bills. of a balance sheet are: assets, liabilities and capital, it is a form of debt. shareholder equity. Assets vs. expenses: A purchase is considered Remember that the Income Statement provides Brady Bond an asset if it provides the company with future information about the economic resources involved Black Scholes These are bonds issued by emerging markets economic benefit, while expenses only relate to in the operation of a company. However, the Income The mathematic formula on which futures and governments and are a good way to gauge the current period. For example, monthly salaries Statement does not provide information about the options instruments are based. markets in those countries; most Brady Bonds paid to employees for services already rendered actual source and use of cash generated during its come from Latin America. during the month would be considered expenses. operations. Black Swan On the other hand, purchasing a computer or This is an event that happens unexpectedly and Buy-side manufacturing equipment would be called an That’s because obtaining and using economic cannot be predicted. A black swan is something The buy side is made up of hedge funds and other asset, as it will probably be used for more than one resources doesn’t always involve cash. For example, that falls outside of any financial modelling so no asset management companies such as mutual accounting period. let’s say you went shopping and bought a new one knows it is coming. The term was coined by funds and pension funds. They are essentially snowboard on your credit card in August, but didn’t Nassim Nicholas Taleb because a black swan customers of the investment banks who are Net Income: Often referred to as the “bottom line”, pay the bill until September. Although the store did is so rare. buying any trades or investments that the banks net income is calculated by taking revenues and not receive cash in August, the sale would still be suggest, hence they are called the buy side. adjusting for the cost of doing business, depreciation, considered August revenue. Blue Chip interest, taxes and other expenses. This number is A large company that is universally thought Cable found on a company’s income statement and is an of to be stable. Buying stocks/shares of a blue Slang term for the USD/GBP exchange rate. It’s important measure of how profitable the company chip company are usually considered non-risky called cable because the exchange rate used to be is over a period of time. A positive net income investments and a way to boost portfolios. communicated by transatlantic cable. number indicates a profit, while a negative net income number indicates that a company suffered a loss, (called a “net loss”).50 51
  • ABCs OF INVESTMENT BANKING Call Done The Fed Hostile Bid A type of option where a trade is agreed to take Said at the end of a trade when the transaction Federal Reserve, more formally, it is the central An attempt to acquire a company without the place on a certain date in the future for an agreed has been agreed. Once “done” is out of your bank of the United States. It is run by a chairman approval of the target’s shareholders/owners. upon price. The trade doesn’t necessarily take mouth, or even if you type it during an who is appointed by the president. Even if you do place but the right to make the trade does. exchange, it is binding and means you accept not work in the US, any decision or announcement Interest Rate the price quoted. by The Fed will affect your market. A percentage of a loan (the principal) that the Call Price borrower pays to the lender as compensation for The price at which a stock or bond can be bought Due Diligence Flotation taking the cash or good borrowed. back by the issuer. The detailed study of information about a The admission of a new company to a stock company, such as its accounts and activities, prior exchange, so that its shares can be traded IPO Commodities to an acquisition or take-over. publicly. See IPO. Initial Public Offering of shares of a company on a Goods that are uniformly traded through a stock market. Also known as a flotation, it occurs commodities exchange. Soft commodities include EBITDA Footsie when the privately owned shares in a company crops such as grains, cocoa and sugar. Hard This stands for Earnings Before Interest, Taxes, Slang term for the FTSE 100, an index of the top become publicly traded for the first time. commodities are mined such as copper, Depreciation and Amortisation. Many people 100 UK companies initially started by the gold and silver. use this metric to value a company when there is Financial Times. Late-day Trading no way to measure EPS, because they have not While not illegal, it certainly raises eyebrows. It is Debt issued shares. Some people don’t pay attention Forward when a hedge fund trades shares of mutual funds Money borrowed by companies, such as to EBITDA and actually think it’s the wrong way to Contract where sale is agreed for a future date, (can be other securities but not often) after hours, loans or bonds. try to value a company because even a company but price is agreed and paid today. Less formal but records the transactions as having taken place that’s not in the red can have a good EBITDA than futures so there is risk of default. during trading hours. Debt Financing (remember the dot com bubble?) A way companies raise capital by issuing bonds or Freddie Mac Long (position) bills. The money is often used to expand business Emerging Market Stands for: the Federal Home Loan Mortgage When you buy a security of a company you are or to buy new equipment. A country with a growing economy but one that Corporation, which was founded in 1970. It is long them as you have a view that the value will usually carries a lot of risk. backed by the US government, though it is a public rise. In options you are long when you buy an Debt Security company. Freddie Mac buys mortgages on the options contract. An instrument such as a bond or security, that Equity secondary market, then combines them together pays the principal to the lender at the end of the Shares in a company. to create mortgage-backed securities, which are M&A security. They are usually considered less risky then sold to people looking for an investment. As Mergers and acquisitions. The area of legal than an equities security. Equity Security of 2008 both Freddie Mac and Fannie Mae were practice specialising in advising companies on see equity; a company’s stock. put under conservatorship of the Federal Housing merging with, or buying, other companies. Deliverables Finance Agency in response to the subprime Comprises the bulk of corporate work. This is what you are working towards in any Equity Derivatives mortgage crisis. kind of project, it’s the good or service you are A derivative whose value is dependent on an Marked-to-Market promising to deliver at the end of a project. equities security. Futures A final price which is fixed at the end of each day. Depending on where you work this could mean Contract similar to forwards where trade is agreed Considered the closing price; books, balances and installing a new IT system or creating a new Fannie Mae for a future date but price is agreed and paid trades must be reconciled with the marked-to- financial model. Stands for: the Federal National Mortgage today. More formal so contract details must be market price at the end of each day as it affects Association and it was created in America during adhered to. the value of trades that day. Derivatives the Great Depression. The organisation does A financial product whose value depends on not lend to the public, but rather is there so that Going Public Mid Cap changing variables. Derivatives include futures, mortgage brokers and other organisations that do This is what happens in an IPO (initial public Mid-sized company that is smaller than a large cap swaps and options. give out mortgages have enough money to lend to offering), when a company sells shares publicly for (blue chip) company, but larger than a small cap people seeking mortgages. The money that Fannie the first time. Companies may choose an IPO as a company. Monetary values that make up the three Mae loans banks and mortgage brokers enables way to raise capital. See Floatation categories change from time to time. them to lend to the public at affordable rates.52 53
  • ABCs OF INVESTMENT BANKING Market Cap Private Equity Spread Venture Capital Otherwise known as market capitalisation, An area of legal practice advising on the funding This is the difference between the ask and the Money provided by specialist organisations this is how some stock indexes determine the (through shares or loans) provided by specialist bid, or the price you can sell a security or asset to invest in companies not listed on the stock importance or value of a company. You calculate organisations to unquoted companies. at and the price you can buy it at. So if you buy exchange. Sometimes referred to as private equity it by taking the price of a company’s share and something for a lower price than you can sell it at, and can be used to fund MBO/MBIs, for example. multiply it by the number of shares outstanding, in Proprietary Trading you’ve made money on the spread. theory giving the value of the entire company. Also known as prop trading. This is when a bank or War Chest firm uses its own money to invest in anything from Squawk Box Stockpile of funds that a company compiles if Mine commodities to stocks to bonds to currency. Intercom still used on trading desks in banks they are thinking of purchasing another company A trading term (mainly in FX) that means buy. and hedge funds so that traders, analysts and (or part of a company) or are guarding against Punter salespeople can communicate instantaneously. a hostile takeover. Can be a good indicator of a Mortgage-Backed Securities Another word for a gambler (online betting sites future move or the future of a company. An investment security that is made up of use this term) but specifically in finance is one Structured Products many different mortgages purchased on the who speculates rather than trades for Investment products that can be one security or Yours secondary market. A residential mortgage-backed investments to own. a bundle of more than one option, currency or A trading term in FX that means sell. security can be purchased by an individual commodity that has a derivative element built in and a commercial mortgage-backed security Restructuring to give it a different risk/return rate. is for commercial properties. By investing in a A way to make a company more profitable by commercial mortgage-backed security, you are revamping the framework of a company and Underwriting basically lending to a mortgage broker so that they can include the legal, managerial or operational In finance, this is when a financial institution takes can give potential homeowners, who may not be aspects of a company. on the risk of selling stock of a certain company able to afford a traditional mortgage, a chance to to clients. They are contracted to use their be a homeowner. Securities contacts to bring on people to invest in the issuing Forms of investment in a company, can either be company’s stock. Negative equity shares (equity) or bonds (debt). When an asset dips in price so that the actual value of the asset becomes less than the Securitisation remainder of the loan that was taken out to A method of raising finance by obtaining loans secure the asset. that are ‘secured’ against a particular asset of the company (asset-backed loan). The loans go into Options a Special Purpose Vehicle and therefore do not An investment where you are given the right to a appear on the company’s balance sheet. trade but not a firm commitment that you must do the trade. This instrument gives you the option Sell side to do the trade, or not do the trade during the Another name for investment banks; because they specified length of the contract. sell investments to hedge funds, mutual funds and other kinds of investment management firms. Check online to hear what Ponzi Scheme employees have to say about: This is an investment scam promising high Short (position) returns. Investors are paid those returns not by This is when you borrow a security, sell it, then • Life on the Job the profit made by the investment, but rather buy it back. You only do this with securities you • Hours, pay and perks using the initial investment of new investors. think will fall so that you sell it at one price, buy • Applications and interviews The bigger a Ponzi Scheme gets, the more new it back for a lower price and make money on • And more... investors they need to keep up the illusion that the transaction. the “investments” are yielding high returns. It is named after Charles Ponzi, who set up the first Spot Price such scam but more recently Bernie Madoff was Price that is agreed and settled usually in two in the news for orchestrating a far-reaching Ponzi Scheme. days. The shortest kind of transaction. WWW.INSIDEBUZZ.CO.UK54 55
  • ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS THE INSIDE BUZZ TEAM importance of doing a bit of research before Thomas Nutt is the founder of Inside Buzz and sending out CVs. When not buzzing, tweeting or previously worked for Vault.com in both New York posting, Dani also likes to read Game of Thrones and London (where he launched Vault Europe and but roots for Joffrey. served as European MD). His years of recruitment publication expertise keep the rest of the Inside Tom McDermott is the newest addition to the Buzz team running smoothly and working hard. Inside Buzz team and has a dual role as part of When he’s not at Inside Buzz HQ or out and both the editorial and sales teams. As a fan of about with clients, you can find Thomas on the Newcastle United, Tom spends most of his time basketball court or travelling around the world. hoping for a return to the glory days of the 1950s. Hannah Maltby is in charge of editorial at Inside Gavin Woods has a keen interest in corporate Buzz, which means she is the one who makes sure journalism and currently juggles a Masters in the company profiles and employee quotes are English with writing and editing for Inside Buzz. collected, formatted, and posted on the website. When not in the office you can find Hannah Arthur Guy is Inside Buzz’s infinitely capable web reading Game of Thrones and rooting for Robb developer. Known as the master of the Buzz- Stark. matrix, Arthur built and maintains InsideBuzz. co.uk. Danielle May works hard to get the Inside Buzz word out to students and young professionals. Zoe Coles oversees our design and production. She loves chatting about career choices and the She makes our guide and website look good. And a huge thank you to our guide writer Gabriella Buonassisi st graduate • Get the late Gabriella works for Inside Buzz as an editor and writer, proofreading copy as well as contributing articles career news & several articles to the Buzz Board. In a previous life she worked in marketing, starting out in New York at a foreign exchange company and has kept an eye on the markets ever since. She likes reading the he web from around t Economist and playing with her Shar Pei, Maya. o’s hiring • Find out wh p of the and stay on to latest jobs engage • Connect and people with the right 56 57
  • AN INSIDE LOOK AT A big thank you to our sponsors 2013 EDITION DownloaD our guiDe: an insiDe look at investment banking employers Find out whether a career in investment banking is the right one for you. In this guide you will find: • 1,000s of reviews from current employees and interns • Employer specific interview advice • In-depth company profiles and salary info Get the latest Buzz on: barclays j.p. morgan rbs banco santanDer macquarie group rothschilD bnp paribas morgan stanley ubs golDman sachs nomura ...anD much more!58
  • What you’ll find inside How well do you really understand Investment Banking? Do you know whether you want to work in equities or corporate finance? Is the buy-side or sell-side right for you? Know your DCF from your EBITDA? And your speads from your spots? Whether you’re a graduate considering a career in investment banking or looking to switch jobs within the industry, this guide will tell you everything you need to know about investment banking and give you the tools necessary to wow in your interview and land that job as an investment banker. This guide covers: • The ins and outs of investment banking • Career paths: the different roles and divisions • An inside look at corporate finance, sales and trading, equities, fixed income, commodities, foreign exchange and more... • The latest tips and advice on applications and interviews www.insidebuzz.co.uk60