A traditional investment bank is composed of multiple divisions, including sales and trading and investment banking. The investment banking division is an intermediary between companies that need capital and clients wanting to invest capital.

Bankers advise clients that need capital or are planning a strategic action, such as a merger or acquisition. Bankers also help execute these strategic actions. Normally, the investment banking division is divided between industry, product, and capital markets groups.

Investment banks are frequently discussed and anlyzed in the financial press, especially during the current credit and financial crunch. This article reviews the structure and normal functions of typical investment banks.

Investment banks primarily have two functions. The first function is to raise and invest capital. The second is to advise clients on strategic actions, such as mergers and acquisitions. Investment banks primarily serve as intermediaries between companies that need capital and companies wanting to investment capital.

In addition, investment banks have been increasingly employing their own balance sheets to generate profits without directly serving clients through groups such as proprietary trading and internal alternative investment funds.

There are multiple methods investment bankers and other financial analysts use to value a company. One frequently employed relative value method is comparable company analysis. Comparable company analysis is especially useful when valuing the minority, non-controlling interest of a company.

Comparable company analysis is rooted in the idea that companies with similar characteristics should have similar valuation multiples. Typically, a group of comparable companies includes companies from the same industry as the company being valued and companies with similar fundamentals.

Financial statements report the basic shares outstanding. However, when attempting to value a company’s market value of equity, fully diluted shares outstanding is used instead of the basic shares outstanding number. Fully diluted shares outstanding provides a better representation of how the market is implicitly valuing the company. Basic shares outstanding are the total shares that a company issued and are outstanding. This number is directly reported on the financial statements.

Damn, it Feels Good to Be a Banker is a satirical account of life as an investment banking analyst in New York at a top tier bulge bracket investment bank. The book is written by Leveraged Sell-Out, the author of the Leveraged Sell-Out blog. One disappointment is that Leveraged Sell-Out was not actually a banker, but rather a strategy consultant that lived with many banking analysts. Still based on my buy-side experience and the stories my banking friends have told me this book contains many underlying truths.

In finance, investing, and business in general, valuation is a key skill. Markets set prices, but applying an accurate valuation to assets being priced in that market can provide insight into how accurate that market pricing is. However, all valuations are biased and based on many assumptions. Therefore, valuation is less of a precise method to determine the “correct” price, but rather more of an art that is a useful tool for evaluating an asset. Valuation models can be very quantitative and complex, but more quantitative models are not always better. Frequently, the …