An Inside Look at Investment Banking 2013

AN INSIDE LOOK AT
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AN INSIDE LOOK AT
2013 EDITION
Insider career info:
• The ins and outs of
investment banking
• Life on the job and
diferent career paths
• Applicaton and
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CONTENTS
INTRODUCTION
Introducton.............................................................................................................................
About Inside Buzz....................................................................................................................
What’s in this guide?................................................................................................................
THE INS & OUTS OF INVESTMENT BANKING
Investment banking explained.................................................................................................
Who’s who in an investment bank?.........................................................................................
CORPORATE FINANCE
What is corporate fnance? .....................................................................................................
Who’s who in corporate fnance? ...........................................................................................
My 24 hours in corporate fnance: an IPO...............................................................................
SALES & TRADING
EQUITIES
What are equites? ..................................................................................................................
My 24 hours in equites...........................................................................................................
FIXED INCOME
What is fxed income? .............................................................................................................
FOREIGN EXCHANGE
What is foreign exchange? ......................................................................................................
My 24 hours in foreign exchange.............................................................................................
COMMODITIES
What are commodites? ..........................................................................................................
WHAT YOU ALSO NEED TO KNOW
Buy side vs. Sell side: what are they, what the heck is a hedge fund
and which role is right for you?.... ..........................................................................................
Investment banking vs. Investment management: what’s the
diference and which one is best for you? ..............................................................................
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THE BANKING INTERVIEW
Tricky interview questons.......................................................................................................
Interview Advice & Tips on Getng Hired................................................................................
Analysing Financial Statements...............................................................................................
THE ABCS OF INVESTMENT BANKING..........................................................................
ACKNOWLEDGEMENTS.......................................................................................................
INTRODUCTION
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 equites or corporate fnance? Will the buy-side or sell-side be right for you? Know your
DCF from your EBITDA? And your spreads from your spots?

It can all be a bit overwhelming, especially if you 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
of the sector, to the diferent roles and divisions, to what professionals think of their everyday work, and
practcal tps 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 litle 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
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A BIG THANK YOU TO OUR SPONSORS
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ABOUT INSIDE BUZZ
Inside Buzz is a careers informaton company that puts a fresh twist on the way graduates and
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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 Accountng
An Inside Look at Consultng
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10 11
JP Morgan, Credit Suisse, Goldman Sachs, RBA,
Barclay’s. No doubt you are familiar with those
staples of the investment banking landscape if
you are at all interested in the world of fnance.
You may be thinking that a career in investment
banking would be the ideal move for you. But do
you know what investment banks actually do? It’s
not a straightorward thing to explain, but let’s
start by statng that it’s not investng, nor banking.
Investment banking is really the raising of capital
(money companies need to help their business grow)
on behalf of clients by buying and selling securites
(something that represents a monetary value,
such as a stock or bond). They are not like retail or
commercial banks because they do not take deposits
from individuals.
Companies that have turned into the investment
banks we know today began by ofering services
called merchant banking. Sometmes this name is
stll used, but today people are more likely to call it
corporate fnance. These are services investment
banks ofer to helps companies raise capital so that
they can improve their business. This can mean
advising a company on buying another company,
orchestratng an IPO or brokering a merger between
two companies. In an investment bank today, the
sales and trading of other instruments such as bonds,
foreign exchange and commodites are lumped
in with corporate fnance under the umbrella of
investment banking, though traditonalists would
consider them slightly separate. But because banks
have a commercial branch and an investment banking
branch, sales and trading sit in the investment
banking side and have started to become grouped
together with the merchant banking actvites.
In the structure of a typical investment bank, you’ll
fnd the roles are broken down into three categories,
or places within the bank: the front ofce, middle
ofce, and back ofce. The front ofce is really the
face of the bank, they are the ones that have the
most interacton with clients and actually perform
the transactons. The middle ofce watches over
the front ofce, making sure that they are not taking
too much risk with the bank’s capital and that all
regulatory rules and compliance procedures are
followed. The middle ofce also includes HR and
some other support roles. The back ofce handles
the tasks of making sure the numbers are correct on
all trades, as well as IT and assistant dutes. In these
pages we’ll break down this large industry to help you
beter understand how it all fts together, what the
diferent divisions actually do, what daily life is like
should you become an investment banker and how
to ace your interview.
But do you know what a derivatve is? Or what a
spot price means? Or how you go about valuing a
company? If any of those questons intrigues you,
then you are ready to delve into the wild world of
investment banking.
INVESTMENT BANKING EXPLAINED
“It’s not a straightforward thing to
explain, but let’s start by stating that it’s
not investing, nor banking.”
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The main diference between an investment
bank and a commercial bank is that a
commercial bank takes deposits. They have
nothing to do with, for example, bond or
stock markets like investment banks do and
the deposits are the way that they raise
funds. Think of a commercial bank as a kind
of broker, providing loans and diferent
types of accounts for individuals and
companies. An investment bank plays with
longer investments to try to make money.
Investment banks are huge, mult-natonal
corporatons, so they need an army of employees
to keep the business going. In its simplest form,
an investment bank’s employees are broken down
into three categories: front ofce, middle ofce
and back ofce. Though there are a lot of diferent
roles within each category, these broad divisions
will give you clues as to whether a certain positon
is client-facing, deals with internal policies or
is tasked with making sure the bank’s image is
maintained in the media.
The front ofce is the face of the investment bank
or fund. They meet with current and potental
clients, execute the trades that make money and
determine the directon of the company. The roles
considered part of the front ofce include:
Sales:
Salespeople are responsible for speaking to
their various clients, suggestng trades for them
and communicatng orders to the trading desk.
Salespeople can deal with individuals, companies,
investment funds and even hedge funds. All of
their clients are called the “buy side” because
they are the ones buying the securites. The
investment banks themselves are considered the
“sell side” because they are the ones that are
selling investments. Sales people need to be able
to mult-task and listen to various conversatons
at once. For example, if your traders are talking
about a great deal or something in which they
have a great price, you need to be paying
atenton to that conversaton while at the same
tme thinking about which of your clients might
want in on that trade. You will also need to keep
up on the markets and know what’s going on in
the world at all tmes including politcal, social and
economic issues. Many salespeople write daily
roundups about their thoughts on certain markets
and events and spend lots of tme on the phone
as well. There are many salespeople out there, but
the successful ones maintain strong relatonships
with their clients by suggestng creatve and
lucratve trades that neither the client, nor
competng salespeople have thought of.
Traders:
Traders, of course, make the trades based on
the orders from the salespeople and clients. But
traders don’t just do what they are told by the
salespeople! A trader’s main aim is to keep the
investment bank liquid (make sure that assets are
not ted up and can be sold easily with minimal
loss. The most liquid asset is cash), so they will
also perform trades where they make some proft
on the spread. This means that they will buy
(bid) a security at one price and sell (ask) it for a
higher price, keeping the gain from the bid-ask
diferental. Obviously traders need to be good
with numbers and be able to do quick calculatons
in their head. Though many traders focus only on
one or a small secton of markets (for example
gold or cocoa) they nonetheless need to be able
to multtask and pay atenton to the tny numbers
changing on several screens at once. Traders also
WHO’S WHO IN AN INVESTMENT BANK
“They need an army of employees to
keep the business going.”
As the fctonal Gordon Gekko said to Bud
in Wall Street: “No, no, no, no you don’t
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
on but a word of valuable advice: don’t do
anything illegal to get that precious info!
12 13
need to have the ability to make hard decisions
very fast – if it looks like a trade may be costng
money, but you’re not sure whether or not to
get out of it, a few minutes’ indecision could see
millions wiped of your book. If you are trading in
internatonal markets, be aware that you may be
in for some long days and also have to trade from
home in the middle of the night in a market on the
other side of the world.
Research/Analyst:
This is also considered a front ofce functon.
Basically, researchers research! They read tons
of data, artcles, and anything else they can get
their hands on to help salespeople and traders
make good calls about the markets. They also use
their data to suggest trades and help guide the
directon of the investment bank by constructng
fnancial models. Analysts in the corporate fnance
department help with IPOs, specifcally gathering
the informaton for pitchbooks. Though not as
client-facing as sales and trading, the research
staf can be involved in client meetngs from tme
to tme. Analysts do have contact with all positons
in the bank and ofen work closely with managing
directors. The MDs main job is to cultvate various
relatonships with clients so they do not have
tme to know everything they need to know for
a specifc meetng or IPO pitch, and that’s when
the analysts come in. MDs and associates depend
on the researchers to provide them with the
informaton they need to make successful deals
and approach the right kinds of clients. They may
not get much of the glory, and may be involved
in several all-nighters, but it’s a fact that an
investment bank would cease to run without the
research department.
MDs:
The managing directors of the bank are the head
honchos but usually have worked their way
up through the bank. Their main job involves
maintaining relatonships, networking and trying
to impress potental clients.
Corporate fnanciers:
Corporate fnance sits a bit apart from the other
sales/trading divisions of the bank. They are not
trading and making markets, but rather helping
companies with certain fnancial situatons. They
act as a broker or consultant when companies
need to raise capital, are looking to merge or buy
another company or want to issue debt – all of
which may enhance the value of their company.
This can include helping to manage investments
or even suggestng a mergers and acquisitons
(M&A) strategy. In this instance, the corporate
fnance people at the investment bank will help
the M&A deals go through. Corporate fnanciers
must not only know what’s going on in the
fnance world, but also have clear philosophies on
investng, stocks and how to value companies. You
can use your creatvity here by listening to what
your client wants to achieve and then suggestng
interestng and potentally groundbreaking ways
they can go about making their thoughts a reality.
Yes, the corporate fnance team gets a lot of the
glory and while salaries can go sky high, you’ll
have to work hard for it.
Investor relatons (funds only):
IR staf are responsible for PR as well as keeping
all investors and shareholders abreast on what’s
going on in the bank. Regular work can consist of
putng together reports and setng up meetngs
and events for potental investors. IR work can
also be unpredictable and involve lots of crisis
management. Markets move very fast and this
can impact funds positvely and negatvely and the
investor relatons team needs to make sure that
they can answer any potentally uncomfortable
questons that may arise.
Like the name suggests, the middle ofce bridges
the gap between the front and back ofces. These
are the kinds of roles that look into what is going
on in the front ofce and makes sure it’s not
“The managing directors of the bank
are the head honchos but usually have
worked their way up through the bank.”
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negatvely afectng the bank overall. The middle
ofce is comprised of:
Risk management:
The biggest part of the middle ofce is probably
the risk management team. These people make
sure that the traders are not taking too much risk
and that they’re not doing things like leaving their
positons exposed overnight. Risk people also have
the ability to cap how much traders can actually
trade, if they feel that they are taking on too much
risk. Employees in the risk department must not
only be good with numbers but must also have the
guts to stand up to traders who are being careless
with their books.
Compliance:
Another important role in the middle ofce is
compliance. This should not be overlooked as
investment banks are now being scrutnised more
than ever; making sure every trade is done by the
book is just as important as making money.
The back ofce consists of all of those nity-grity
roles that keep the place running smoothly.
This includes:
Operatons:
The operatons people are the ones who check
over every trade to make sure the numbers are
correct and the trading desk has bought or sold
Here are two cautonary tales of rogue traders causing major damage. They underline the
importance of controls, risk management and efectve oversight.
Barings Bank: in 1995 London’s oldest merchant bank collapsed because of Nick Leeson, who
was head of derivatves in their Singapore ofce. Leeson was meant to be arbitraging (meaning
buying a futures contract on one market and selling it at a slightly higher price on another
market almost immediately and making a small proft on the diference)futures contracts from
the Nikkei 225 index which were listed on the Osaka Securites Exchange in Japan and the
Singapore Internatonal Monetary Exchange in Singapore. But Leeson decided to hold onto his
futures contracts instead of selling immediately because he was convinced that the Japanese
market would strengthen and make him more money. When he was proved wrong he decided to
start forging documents, for example saying that a £200 million loss was actually a £102 million
gain. In the end he lost the bank £827 million, more than they had and there was no way to
recover. Part of the problem was that Leeson was the trading foor manager and in charge of
setlement operatons, so when he began forging trade documents, no one saw. In the end he
blamed the fact that no one at the bank could see how this arrangement could spell disaster and
that people were too scared of looking foolish to do so and those that did think something was
up were ignored.
In 2008 it emerged that trader Jerome Kerviel at French bank Societe Generale, was forging fake
index futures trades. Soc Gen has claimed that all of these rogue trades totaled 49.9 billion euro,
way more than Kerviel was authorised to handle. When the bank eventually uncovered these
illegal trades, they decided to get out of those positons immediately. Closing out those trades
cost the bank 4.9 billion euro. Though Kerviel claims that what he did was practced regularly by
other traders, and some people think there must have been people helping him with the fraud
instead of working alone, Soc Gen maintains that every few days before these positons would
have triggered an automatc warning from the trading system, Kerviel would close out the trades
and move them so that no one would fnd out. On the occasions that he was questoned, he
would say that the trade was a mistake, cancel it and then create another trade with a diferent
instrument to replace it. But because it was in another form, no one notced. It would have taken
a very eagle-eyed risk manager to have avoided this disaster.
14 15
what they were supposed to (if the trade was
to buy USD but instead the tcket says selling
USD, well then, you’ve got a problem). They also
constantly reconcile trades and open balances
with banks and other fnancial insttutons. These
are the editors and the proofreaders who make
sure the executon is fawless. This is another
role that may be overlooked by people on the
outside, but any investment banker knows that
a bad operatons team can cause unnecessary
headaches and completely mess up a proftable,
well-working team. For an operatons role you’ll
need to be comfortable working on a variety of
IT systems or at least learning them quickly. Of
course, an eye for detail is extremely important
as is good listening skills. If a trader asks you to
check something urgently, they will be very upset
if they have to repeat it. The operatons team
also communicates, usually by phone, with other
operatons teams as well as salespeople at the
other banks who are doing business with them, so
you’ll need a good rapport with people, especially
when lots of money is on the line.
IT:
Another increasingly important role in an
investment bank that is considered part of the
back ofce is the IT department. No longer just
fxing desktops that are slow, IT departments in
investment banks are now in charge of complex
computer networks, trading platorms, and
communicatons systems. They may also be tasked
with developing bespoke sofware to facilitate
the bank’s trades and content management. And
not only the upkeep is important, but also the
security of those systems as well. If any sensitve
informaton gets out, it could spell real trouble for
the bank. Nowadays practcally all trading is done
electronically and sensitve informaton is also
kept electronically.
Investment bankers are also always looking for
easier and faster trading and content management
systems so it’s up to the IT staf to suggest
possibilites and implement them. Traders are also
now increasingly set up to work from home so
that they can trade out of ofce hours, another
thing IT will have to look afer. No one can do
their job if the system goes down, something
investment bankers will not tolerate, so the IT staf
need to be proactve in systems upkeep as well as
suggestng cutng-edge technology that will give
the investment bank a clear edge over
the competton.
Investment banks deal with a wide range of
fnancial instruments and clients, and therefore
have tons of diferent roles to fll. The work is
high-pressure and days can be extremely long,
but it can also be satsfying, interestng and
the paycheck usually makes all that hard
work worth it.
On 6 May, 2010, the Dow Jones Industrial
Average suddenly plummeted 1,000 points.
People struggled to fgure out what could
cause such a sudden, massive drop. One
theory was that someone had purposely
or inadvertently added a few extra zeros
to a trade order to sell shares. Afer that
some companies’ shares actually ended up
trading at a penny! There was a 20 minute
window when prices went haywire and all
of those trades ended up being cancelled.
There are all kinds of conspiracy theories
as to the role of computers and electronic
trading platorms in arguably the weirdest
day the Dow has seen so far.
“The paycheck usually makes all that
hard work worth it.”
Within an investment bank, the corporate
fnance team acts as a fnancial advisor for
large companies, corporatons and even some
governments. When a corporaton wants to grow
the value of their company they will approach
the corporate fnance team at an investment
bank to frstly, suggest ideas about how to reach
their goals, and may also ask them to actually
help broker the deal(s). Most of the tme a
corporate fnance team will suggest a merger or
the purchasing of a company or part of a company
if the client wants to expand their business and
increase proft. If the client wants to raise funds
they might suggest an IPO (Inital Public Ofering,
also known as “foatng”) – issuing stock – or
advise issuing other securites such as debt.
They may also bring up things like joint ventures,
long-term investments, merger and acquisiton
possibilites, debt restructuring or management
buy-outs (or buy-ins). The diferent suggestons
may come about through fnancial modelling or
simply a deep understanding of that partcular
industry/experience within that industry.
Even within the corporate fnance division
there are lots of teams, each one handling a
diferent way that the client can implement their
fnancial plan for the future. One team may
only deal with IPOs, one team may only deal
with manufacturing companies, so once you are
on a team, it is your job to know that industry
inside and out so as to be able to advise your
clients with expert knowledge. Keeping tabs on
industry news and moves by other companies in
the sector are important as well, so that when it
comes to actually guiding an IPO, you price shares
appropriately that will make the deal a success.
Corporate fnance is one of the most demanding
areas of investment banking. Forget 9-5 or even
7-7, your hours are set by your clients and not
the opening and closing of markets. But for all of
those hours and hard work, you will be rewarded.
Analysts are expected to crunch numbers and
know about the clients, compettors and other
potental clients in the industry. Associates are
stll responsible for data, but also have account
management dutes so are client-facing. Managers
and VPs leave the details up to the analysts and
are mostly concerned with keeping clients happy,
fostering new relatonships with potental clients
and general networking to keep the bank in the
know about industry moves. There are many
diferent roles within corporate fnance but all are
challenging, interestng and can be very lucratve.
WHAT IS CORPORATE FINANCE?
“Once you are on a team, it is your job
to know that industry inside and out so
as to be able to advise your clients with
expert knowledge.”
“Forget 9-5 or even 7-7, your hours are
set by your clients and not the opening
and closing of markets.”
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nighters to get it all done). But banks will have
some nice perks that can make the many long
nights slightly more bearable such as free food
and complementary taxis home in additon to
the standard perks of free or heavily subsidised
gym memberships, dry cleaning services and free
tckets to concerts and sportng events. You’ll
work very long hours and might not get much of
the glory, but you will be an integral part
of your team.
Associates
Associates are higher up in the pecking order
than analysts, but sometmes not by much. They
might handle the more complicated models,
but they generally oversee and hand out work
to the analysts as well as concern themselves
with the pitches to the clients for whatever deals
the team thinks are best. This takes the form of
pitchbooks and generally associates work with
analysts to create these. The pitchbooks are used
to gain new clients and usually for each potental
client, the associates and analysts create two: a
general pitchbook outlining the bank and what the
corporate fnance division has accomplished, and
then a more specifc one that contains partcular
models aimed at exactly what this client wants
to achieve. So though associates stll have to do a
bit of the grunt work of the analysts, they do also
get face tme with clients, which can be a nice
change. This also means that while you need to
be technical, you also need good sof skills and
need to be able to meet and socialise with clients.
An associate with an MBA might have a beter
work life than one without, as this can mean more
experience and thus more responsibility and more
leeway from the bosses. Expect long hours again,
though not as long as when you were an analyst.
This is simply a reality of working in corporate
fnance – your regular leaving tme might be
around midnight and you’ll probably have to work
weekends regularly at frst, then possibly around
10 hours on weekends once you’ve had a few
years as an associate. Here you don’t necessarily
have to be a maths wiz to shine, but as long as you
possess general business knowledge,
business sense and an overall grasp of the
markets and your clients, you can really stand
out as an associate.
Vice Presidents
As you may have guessed, VPs are on the next
rung of the ladder. They oversee the analysts
and associates and while they stll keep an eye
on the modelling, meet with the analyst and
associates to go over work and make any changes
to models or presentaton, they really don’t do
any themselves. They do, however, oversee the
pitches because one of the main responsibilites
of the VPs is client management. These are the
people who spend tme with most of the clients
and so will be in lots of meetngs and disappear
for many working lunches and dinners. VPs get
paid more, have more responsibility, but also
travel a lot visitng clients, so they are sometmes
barely in the ofce. They regularly are called out
to client sites on a moment’s notce so planning
a work week or even a weekend at home can
be difcult and nearly impossible. They are also
probably the ones who represent the company
at various conferences and industry gatherings,
trying to gain new business and network. Yes,
the grunt work is over by this point and you’re
probably getng paid quite a bit, but you may
not have much tme to spend your money or see
your family as ofen as you’d like.
Directors/Managing Directors
This is where all that fnancial modelling pays of!
MDs sit at the top of the corporate fnance food
chain so they prety much get to do what they
want. They are in the ofce only when they want
to be and only visit the clients that they want to
– usually the most important clients are the ones
the directors handle themselves. The directors’
real job is to represent the team, make sure the
clients are happy and drum up as much new
business as they can.
The whole corporate fnance secton is split up
into deal teams and within those teams are the
diferent roles. Though one team may only be
concerned with M&A and another might only
work with the oil industry, their structure is
basically the same.
Analysts
First you have the analysts. They are at the
botom of the ladder and unfortunately, that’s
most likely where you’ll have to start. Analysts do
a lot of the not-so-fun work that is necessary for
transactons to go through. As an analyst you’ll
fnd yourself evaluatng fnancial statements
as well as reviewing things like management
structure. You may also have to value a company
based on similar companies in the same industry
and see how your client measures up.
Afer analysis comes the fnancial modelling
that will tell the team if a proposed deal is a
good idea or not and from there you’ll draw
your conclusions as to what the best strategy
is – does the client need to raise more cash?
Should they be purchasing a compettor or is it
beter to let a compettor purchase them? You
might already know what DCF Analysis is, and
that is an example of a fnancial model. There
are many other kinds of models and which ones
you’ll use obviously depends on which team
you sit, but you could be tasked with looking at
balance sheets to predict a company’s future
profts, thinking broadly about a company and
its situaton (what if this happens or what if
that happens), or you could be asked to use a
complicated mathematcal algorithm dealing with
risk, credit or interest rates. If you are an analyst,
spreadsheets will become your best friends.
If you are into maths, you may love being an
analyst; or you may only be using the positon
as a way to move up. Either way, you will be
worked hard as an analyst. A VP or director
might have a hunch about a certain deal, but it
is you who will provide the data to either back
up or disprove his (unfortunately it usually is a
his) theory. This means that you are on a short
lead and cannot get anything wrong. Before
you submit any work make sure it is double and
triple checked for errors as well as grammar
mistakes. Traditonally analysts work long and
varied hours. If no deals are going on the ofce
might be quiet and you’ll simply have to keep
up on the news or maybe work on a new model
you’ve been discussing with colleagues. But then
it can seem like everything happens at once and
you’ll have so much work that leaving the ofce
afer midnight will become a regular occurrence.
You could be working on a pitchbook for an
IPO one day, then handling the models for a
proposed merger the next, then making changes
to the pitchbook, then doing some last-minute
writng for a transacton on litle notce. Analysts
are expected to work fast and provide the data
asked for without questons (since directors are
only concerned with selling the bank to clients,
they will usually promise them multple reports,
models and presentatons in a few days’ tme,
which means you might have to pull some all-
WHO’S WHO IN CORPORATE FINANCE?
“First you have the analysts. They
are at the bottom of the ladder and
unfortunately, that’s most likely where
you’ll have to start.”
“Banks will have some nice perks such
as free food and complementary taxis
home in addition to the standard perks.”
“As long as you possess general
business knowledge, business sense
and an overall grasp of the markets and
your clients, you can really stand out as
an associate.”
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and its achievements, similar deals that the bank
has done to highlight their expertse in the area,
the projected value of the company based on
other companies in the same industry that have
issued shares and highlightng the bank’s place in
a “league table” of other underwriters.
The actual pitch
It’s probably annoying for the analyst and
associates that work so hard on the pitchbooks
(the VPs and MDs also work on them, but not
as much as the analyst and associates do) that
they don’t get to make the actual pitch, but
that’s how it goes! An MD and a VP and maybe
a stock analyst, who will deal with the shares
once they are issued, will be the ones to give the
presentaton to the company to try to persuade
them to use their bank as an underwriter. Because
at this point in the deal, MDs and VPs from several
banks are parading in and out of their ofces, this
is generally referred to as the “beauty contest”.
You’ve won! Now the real work starts
Once your team has been named as the manager
of the IPO, next you have to get together with
the other partcipants who will be helping out
with the deal. This list usually includes: the
main players of the company itself like the CEO,
CFO and any important department heads; the
accountants for the company; the company’s
lawyers; the lead manager; any co-managers and
lawyers or council for the underwriters.
Then the due diligence begins. Before the stock
is issued, there needs to be a lot of research
undertaken to make sure the tmeline and the
price the stock is issued at is correct so as to make
the deal a success. The frst step in this research
is to speak at length with the management of the
company as well as to get to know that company
and the industry inside and out. This could mean
researching other similar companies or making
site visits to the company’s diferent plants, ofces
or factories. The idea is to get a sense of output,
growth, health and general directon so that the
performance of the company in the short term, as
well as long term, can be assessed.
Drafing
The prospectus is the basic marketng tool used to
get people to invest, or buy the stock that will be
issued. The prospectus is put together, or drafed,
afer the due diligence is fnished and is the most
labour intensive step afer the second pitchbook.
The frst draf of the prospectus is writen by
the issuing company’s lawyers, then gets passed
around from team to team as diferent drafs of
the document are made. The more teams that
are involved in the deal, the longer the drafing
stage as everyone has diferent ideas about the
tone, the style, what should be included and
what should be lef out. There are mega drafing
sessions where the various teams meet to discuss
the prospectus and those meetngs can even
involve some analysts and associates on occasion.
Usually this stage takes up to 10 weeks and most
tmes ends up at an all night fnancial printng
company to get it completed on tme.
And this isn’t just a case of agreeing on the words
and then hitng “print”. Usually for an IPO you
might need as many as 20,000 copies of the
Though the deals within corporate fnance can
take on many diferent forms, a regular one is an
IPO. IPO stands for Inital Public Ofering (if you
hear a company is “foatng” or considering a
“fotaton” or an “ofering”, they are considering
an IPO) and this is when a company decides to
issue stock, primarily to raise funds. The corporate
fnance team in an investment bank comes in by
arranging the deal and taking some of the risk.
You may have heard of the term underwritng -
this is what the investment bank does in an IPO,
they advise the company releasing their shares
and then they take on some of the risk involved
in actually being able to sell those securites. IPOs
can make up a large amount of what corporate
fnance teams do so it’s important to know exactly
what goes into one and what the tmeline of a
deal looks like.
Hear it through the grapevine
When a company wants to issue shares – because
they may want to raise money without borrowing
- many tmes the informaton leaks out and
then diferent investment banks rush to pitch
their services to that company. This is where the
relatonships that the directors and VPs cultvate
come in. If they have a great network of people
they know in the business, they are more likely
to be the frst to know that a company is thinking
about an IPO. The directors get paid the giant
sums to basically keep up on what everyone in
the industry is doing and to keep relatonships
going. It may seem like all they ever do is go out to
dinner with clients and potental clients, but this
will be how the bank fnds out about upcoming
deals and how companies will think of your bank
frst when they want to do a deal.
General pitching
Once a higher up in the corporate fnance team
hears that a company might be considering an IPO,
they will go back to their analysts and associates
and have them put together a pitchbook. The frst
pitchbook usually assembled is a general one that
outlines key points about the bank and highlights
any successes that the corporate fnance team
have had. Obviously this is the “pitch” to the
company to use this bank as their IPO manager.
Then the higher-ups will try to schedule at least
a few follow-up meetngs in the hopes that they
are one of the investment banks hired to manage
the deal. And usually there is more than one bank
working on one public ofering so being on good
terms with corporate fnance teams from other
banks is important too. One bank will usually take
the lead on an IPO (the manager), but there may
be another or even two other banks in charge of
specifc areas of the deal.
Second pitchbook with more detail
Then afer some inital contact, the corporate
fnance team will produce their second pitchbook.
This pitchbook is much more detailed and will
use fnancial modelling to get the data needed.
This is a lot of work, much more so than the frst
pitchbook – you might want to bring a pillow and
a toothbrush to work cause you’ll probably be
spending a night or two in the ofce. A reason
the second pitchbook may be very complicated
is if this specifc company has never previously
issued stock and therefore there is no data
to present! If there is no history of what will
happen, how much money they will be able to
raise, etc. the analysts and associates must do a
lot of comparable analysis, and that takes tme.
These pitchbooks will probably have the following
informaton: general informaton about the bank
MY 24 HOURS IN CORPORATE FINANCE –
AN IPO
“MDs and VPs from several banks are
parading in and out of their offices,
this is generally referred to as the
“beauty contest”.”
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preliminary prospectus (called the red herring,
or red for short) and 10,000 copies of the fnal
version! These fnancial printers are set up so
that the teams that oversee the fnal draf of the
prospectuses can work uninterrupted for two
days in a row if needed. They get food delivered
to them whenever they want and there are even
showers on site – great for not smelling, bad for
taking away excuses to leave.
Getng the word out
At this point the prospectus is fnalised, printed
and has been sent to as many potental investors
as the team can think of. Now you need to follow
up to get the greatest number of investors on
board as possible. Both the VP and MD of the
lead manager and the management of the issuing
company will come up with a presentaton to
show to as many potental investors as they can.
Other marketng materials are constructed by
analysts and associates such as “selling memos”
and other documents that salespeople will use to
entce their clients into investng.
This part of the whole process is sometmes
called the “road show” because the company’s
management, along with the representatves
from the managing corporate fnance team, will
sometmes make hundreds of presentatons in
loads of diferent cites. It can basically mean
weeks of hotel rooms and airplanes. And at a road
show, the associate’s role unfortunately amounts
to litle more than babysitng and making sure
everyone has their luggage and hasn’t lef their
passport at home.
Is the price is right?
Part of putng the prospectuses together means
pricing the stock that will be ofered. Usually a
range will be set by the underwritng team while
doing the due diligence. Hopefully the team have
got it right and the stock ends up trading at the
high end of the range. The best case scenario is a
stock that trades above the top of the range and
that happens when there is a lot of buzz behind
the stock and it becomes a very sought-afer
investment. Conversely, if no one cares about
your new stock then it may trade below your
predictons, which is not good.
Then when the stock is issued it’s up to everyone
to watch how it performs, some may go up
slightly while others may look healthy on the day
the stock is issued and then drop on day two.
Hopefully the due diligence and marketng phases
have worked together to create a good product
that is well publicised.
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22 23
The equites desk in an investment bank deals
with company stock (called shares in Europe).
Depending on where you are, you will have to
follow the various indices around the world such
as the FTSE, NASDAQ, Dow, CAC and the DAX. Not
only will you have to pay atenton to the numbers
– which stocks have gone down and which are up
– but you will have to learn about how companies
are valued. You’ll have to form opinions on how
companies become overvalued and undervalued,
good investment strategies for those looking to
invest in stocks and how certain social and politcal
events can afect companies’ share price.
What is a stock market?
A stock market is an aucton where stocks are
traded; stocks are traded on a stock exchange.
Traditonally the stock exchange is an actual
locaton where people, banks and hedge funds
call in their orders and then the order is placed.
Examples of stock exchanges are: the New York
Stock Exchange, the Frankfurt Stock Exchange and
the London Stock Exchange. Nowadays there are
also virtual stock exchanges where everything is
done over computers. The NASDAQ is an example
of a virtual stock exchange.
The NASDAQ
This stands for Natonal Associaton of Securites
Dealers Automated Quotatons and though it is
US-based, is completely virtual and electronic.
Started in 1971, it came out of over-the-counter
trading model, which means there is no physical
exchange to go through, all orders are processed
by computers and can be completed from
anywhere. Besides being ahead of its tme by
using computer systems to buy and sell stocks, it
was also the frst exchange where people could go
online to trade stocks.
The London Stock Exchange
This exchange has been in existence since 1801
but buying shares stared as early as the 1680.
This came out of the need to raise money for two
maritme trading voyages, one to China and one
to India. It is thought that by 1695 there were
140 companies whose shares were being sold
and traded. The moto on the coat of arms of the
exchange translates to: “My word is my bond”.
What is an index?
The indices listed below are a way to keep track
of various stocks and whether their stock price
is moving up or down. An index will only track
a certain part of a stock exchange. For example,
the FTSE 100 only tracks 100 companies but it is
considered a great indicator at the overall health
of the Britsh economy.
The FTSE 100
First you’ll have to know how to pronounce it
(footsie) then you’ll need to know that it stands
for the Financial Times Stock Exchange 100. It was
started in 1984 jointly by the newspaper and the
London Stock Exchange (which has now turned
into the FTSE Group, which is an independent
company all together) to list blue chip (or large
cap) companies appearing on the exchange. So
many instruments are based on the FTSE and it is
broadly regarded as a way to determine the health
of the UK economy.
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 proftable.
They are called blue chips because in poker the
blue chips are the most valuable. Like the FTSE
100 in the UK, the S&P 500 is a good gauge of the
US economy. All of the companies on this index
are public and also trade on the New York Stock
Exchange and the NASDAQ. Since 1957 the index
has been published by Standard & Poor’s, which
actually publish many diferent indices.
The CAC
The CAC 40 is a French stock index of the 40
French companies on the Euronext Paris Exchange
(formerly the Paris Bourse) with the highest
market capitalisaton. Market capitalisaton, or
market cap, is when you determine how much an
entre company is worth based on its share price.
So if the share price is x, you multply that by all of
the shares that have been bought by shareholders,
in theory giving you the value of the entre
company. The CAC 40 includes companies such
as L’Oreal, BNP Paribas and AXA but market cap is
calculated regularly and companies may drop out
of the CAC 40 if their market cap falls. Though the
companies are French, many of the stockholders
are internatonal and come from Britain, Japan,
Germany and the US. Because many of those
companies listed are multnatonal, the CAC 40
has a very internatonal feel and afects other
internatonal markets too.
The DAX
The Dax, or the Deutscher Akten IndeX, has
been around since 1988 and lists the 30 biggest
companies trading on the Frankfurt Stock
Exchange. Each quarter they review the list of
companies named on the index and make any
appropriate changes so the largest companies are
always represented on the index. Again, this is a
great general benchmark for the German economy.
The Nikkei
This is a price-weighted index from Japan. A price
weighted index means that the percentage of the
index made up of a partcular stock depends on
the stock price. So the higher the stock value, the
larger the porton of the index it will make up.
This is diferent from a market-weighted index
where the equity market value (value of the share
tmes number of shares outstanding – shares that
are out in the market and have been purchased)
determines how big a percentage the company
gets. The Nikkei was started in 1950 by the Nihon
Keizai Shimbun newspaper and is reviewed yearly.
What makes stocks move?
Many changes in a country’s economic situaton,
to a specifc company announcing that their CEO
is stepping down (Google Steve Jobs and Apple),
can afect stock price. Perhaps the biggest trigger
for a stock moving is interest rates. The consumer
price index tracks the price of everyday goods and
if those prices rise, people fear infaton. When
there is infaton it means that money is not as
valuable anymore because it takes more of it
to buy things than before. That also means that
interest rates rise to compensate. All of this means
investors look to more low-risk moves, such as
bonds, as opposed to trading stock.

People also constantly look at the GDP of a
country to get an idea of the overall economic
health. If GDP slows down then a recession may
not be far behind. In a recession everything slows
“You’ll have to form opinions on how
companies become overvalued and
undervalued and how certain social and
political events can affect companies’
share price.”
“The FTSE 100 – First you’ll have to
know how to pronounce it!”
WHAT ARE EQUITIES?
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down and demand for companies’ products sufer.
The companies’ profts will shrink and that will
cause their stock price to plummet.
If you’re tracking an individual company you need
to pay atenton to the earning per share (EPS).
BOX Companies release this fgure quarterly
and it not only tells you about the health of a
company, but whether its stock is overvalued
or undervalued. If analysts have predicted a
company’s EPS at one price, but the actual price
is lower, the price of that stock will fall as people
look to sell of a stock that is in worse health than
they thought. If the opposite happens and the
EPS comes in higher than expected, that
stock will rally.
How stocks are measured and valued
You can’t just go on the price you see on your
screen. People have developed hundreds of
diferent ratos to value stocks and compare them.
These are the most valuable ones you need to
know if you want to work in equites:
P/E rato
This stands for Price to Earnings and simply is the
price of the share divided by the Earnings Per
Share (EPS). This will tell you the price of the stock
related to the earnings of the company. So if a
stock has a high P/E rato that means it’s expensive
as you are paying more for those earnings per
share. If two companies have the same EPS but
one has a higher P/E rato, that one is a more
expensive of the two and means you are paying
more for the same EPS. Ofen the P/E rato as
expressed by saying that a company is trading at
20 tmes its earnings if it has a P/E rato of 20.
PEG rato
This stands for Price/Earnings to Growth rato and
takes the P/E rato and then accounts for how fast
the EPS for the company will grow. A stock that
is growing rapidly will have a higher PEG rato. A
stock that is well priced will have the same P/E
rato and PEG rato. So if a company’s P/E rato is
20 and its PEG rato is also 20 some might argue
that the stock is too expensive if another company
with the same EPS has a lower P/E rato, but that
also means that it’s growing faster because the
PEG rate is 20.
EPS, or Earnings Per Share, will tell you how much
each share of a company will earn. It’s probably
the most important thing to look at when deciding
to invest in a company. The most basic formula
to calculate EPS is proft divided by a weighted
number of outstanding shares. It’s important to
use a weighted number as the actual number of
shares bought can change ofen.
MY 24 HOURS IN EQUITIES
ANNELIES VERMEULEN, EQUITY RESEARCH ANALYST
(JOINED J.P. MORGAN IN JUNE 2009)
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I work in the European Equity Research team here
at J.P. Morgan, which is divided up by industry.
I work in the Property team, with whom I did
my summer internship whilst at university. Our
job involves analysing the companies we cover,
publishing reports and advising clients. We
look at all aspects of the industry and all types
of property, including house prices, shopping
centres, ofces and residental, as well as
transactons made by the big property companies.

I usually get in between 6.30 and 7.00am,
depending on how busy we are.
The frst couple of hours are spent looking at
the newsfow and putng together our ‘Daily’
research report, which is sent out to clients at
around 9.00am. This includes updates on what
happened in the market the day before, any
newsfow from the industry such as acquisitons or
disposals (buying or selling propertes or property
developments) made by one of our stocks, as well
as transactons or deals across the wider sector.
My team covers around 45 European Real Estate
stocks, which also all regularly report earnings
results. We include results commentary in our
Daily, such as whether results are in line, above or
below expectatons.

Around 9.00am we get breakfast. Then the rest of
the day is very varied – if one of our companies
has reported results then we’ll spend the day
updatng the models, sending out alerts, going
to meetngs, speaking to salespeople and traders
as well as calling clients. Clients will sometmes
talk to one of our salespeople frst if they have
questons on a stock, but if they have more
specifc questons about the company, then they
talk to analysts like us.

We also publish a huge, 400-page annual report
in September – the Property Handbook. This gives
a more fundamental analysis of the property
market, as well as highlightng our “top picks” for
the year. These are the stocks we would advise our
clients to invest in.

For each of the stocks we cover, we give either a
buy, hold or sell recommendaton, which clients
look at when deciding whether or not to invest.
We upgrade/downgrade stocks periodically
depending on where we think the share price is
going to go. When speaking to clients, we always
explain the reasons for our recommendaton,
which are a combinaton of many diferent factors.

We also regularly atend property tours and
site visits of our companies’ assets and new
developments. For instance, one of the companies
we cover recently acquired The Traford Centre in
Manchester, and organised a trip for analysts and
investors to see the shopping centre.

Usually I go home around 6.00 or 7.00pm.
Occasionally though, when we’re working on a big
sector report it can be later. Generally, I would say
that my days are very varied - it is hard work but
we have a lot of fun too.

26 27
Fixed income is an instrument that you as an
investment banker can use to make a proft for
you and your clients. The name fxed income
explains exactly what it is: debt securites that
pay an amount of income at fxed intervals over a
certain length of tme. There are many diferent
kinds of fxed income deals you could make and
each work in a diferent way. Here are the basic
fxed income products that make up the desk.
Bonds
This is the biggie in the fxed income market. The
most basic defniton of a bond is a kind of loan.
If a company issues bonds and you buy one, you
are basically loaning them money. In exchange,
they will pay you interest on a fxed schedule
for the length of the loan, or bond. When the
bond expires, the company will also pay back the
original amount of the bond, or the principal.
Bonds are great for people who feel comfortable
investng in something that they know will
pay them quarterly, annually, or whenever
is stpulated.
Bonds are issued by lots of diferent places; here
are the ones you need to know about:
• Government: Government issued bonds are
considered one of the most stable investments
you can make. Actually, there are three kinds
of securites to go for: Treasury bills (or T-bills),
which mature for up to two years; Treasury
notes, that go on from three to 10 years; and
Treasury bonds, which last from 10-30 years. Of
course these are seen as stable because really,
is the government going to default? Well, in
theory, no, but stranger things have happened.
If you keep a close eye on the Eurozone
economies you may not be so sure. But the
amounts of the payments are afected by
interest rates, so they’re not totally without risk.

• Municipal: These are regularly called “munis”.
They are bonds that are issued by the local
government or a city. Munis are also considered
quite a safe investment, as cites rarely default
(but again, never say never...). You will mostly
hear talk of munis in relaton to the US but a
UK muni market does exist and there are also
operatng muni markets in Sweden and
the Netherlands.
• Corporate: These are issued by a company
just like they would issue stock (but don’t get
confused – a stock is a share in the company
and a bond is a debt security). Issuing bonds
is a great way for a company to raise money if
they are looking to expand or for things
like new ofces.
Another important aspect of the bond market is
the ratngs. Standard & Poor’s, Moody’s, and Fitch
Ratngs are the credit ratng agencies you need
to familiarise yourself with. Bonds are rated on a
scale from AAA (the best ones, most likely to meet
payments) to D (a greater chance of default which
means you’ll lose your money). The agencies label
their levels slightly diferently, but in general the
bonds that have a ratng of at least BBB are most
likely complete payments. Anything with a ratng
lower than that is considered a high-yield bond,
more commonly is known as a junk bond (also
called “high-yield” or “speculatve” bonds when
you want to be a litle more tactul about it). Well,
the name alone should tell you all about those!
Yes, they can be high yield, but they are so risky
that there is a big chance the issuer will default
and that that means you don’t get your money.
Derivatves
Derivatves are tricky. We’re used to seeing
something, it’s got a price tag, and that’s how
much it’s worth. But a derivatve’s value changes
based on a host of diferent factors. Here are the
basic ones to learn:
• Forward: A forward contract means that
someone agrees to buy something from
someone else at a future date for a fxed price
– got that? So say that you want to buy a car,
but you don’t want to buy it for another year.
The car dealership agrees to sell you the car you
want in exactly one year for £20,000. Well, in
a year’s tme the value of the car could go up
or down, depending on a lot of things. So if the
value goes up, the dealership stll has to sell you
the car for £20,000 and that means that you
have made a proft, while they have lost money.
• Opton: Instead of a forward, you can buy an
opton. So, if in a year’s tme the value of the car
is only £18,000, but you stll have that forward
saying you have to pay £20,000, the opton
gives you the opton to opt out of the deal. That
£20,000 is also called the strike price, or the
price that the contract will be carried out for, if
the deal happens.
• Interest Rate Swap: If you fnd the fnance world
interestng, you’ll love the idea behind interest
rate swaps. Basically, this allows you to swap
one cash fow for another. There are a lot of
reasons for someone to do this, but let’s say
that there’s a company that pays interest on a
loan and that interest is foatng, meaning that it
changes. If the directors of that company decide
they don’t like being exposed that way, they can
swap their payments with another company
whose interest rate payments are fxed. So
Company A pays Company B their foatng rate
and Company B pays Company A their fxed
rate. Swaps can be structured in a number of
ways, but this is the most basic. Coming back
to fxed income, this is another way that a
partcular party can ensure that they are getng
a payment at a fxed interval.
So as you can see, investment banking isn’t just
“buy low, sell high”. Fixed income is a useful
market to understand, and an essental tool in the
investment banking world.
WHAT IS FIXED INCOME?
“Investment banking isn’t just “buy low,
sell high”.”
Imagine your local bookseller, instead of
requiring you to pay £10 for the book in
four weeks’ tme, says to you, “If you come
to me in four weeks I’ll sell you the book
at £10 but you are not obliged to buy the
book from me” (Your local bookseller is, of
course, unlikely to give you this opton for
free. If anybody ofers you a free opton you
should generally take it…). In this case you
would buy the book from the bookseller
in four weeks’ tme only if the price for the
book at all other booksellers were greater
than £10. In other words you would exercise
your opton only if it were valuable for you
to do so. But even prior to exercise, your
opton has a value. That value is made of two
components: inherent value (the amount by
which the market price of the book at that
tme exceeds the £10 price tag you and the
bookseller have agreed) and tme value.
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FX, or forex, stands for foreign exchange. Every
bank has an FX desk but it’s more important
to some banks than others. Forex trades are
all over-the-counter – this means that there is
no centralised body or place where things are
regulated and traded. The trades take place
directly between two partes with no exchange
house in the middle. Every country has its own
central bank where currency is controlled, but
there is not one global body that oversees the
currency market. FX is also interestng since
anyone can get involved – from someone day
trading from home for fun, to global insttutons
making a deal ahead of an internatonal purchase,
to hedge funds speculatng in more than one
currency, the forex markets are open to everyone.

Some countries decide that they want more
control over the value of their currency and so
they have what is called pegged or fxed exchange
rates. Such countries include: Venezuela, the
Bahamas and the city-state of Hong Kong. Their
central bank ensures that their currency is directly
correlated to something else, whether that is
gold or another major currency. It is helpful for
controlling infaton and also used by smaller
countries to ease trade, since their currency
is directly related to a major world currency
or instrument. Most countries, though, have a
foatng exchange rate, and that rate is dictated
by the markets. Some economists think this way
is more helpful as it allows currencies to work
themselves out in the markets and makes it easier
for countries to deal with any ups and downs the
currency may face. The UK, US and the Eurozone
all have foatng exchange rates.
FX desks have a separate group for Emerging
Markets FX. These are currencies from countries
that are experiencing tremendous growth.
They were formerly known as less developed or
Third World countries but now those terms are
now outdated. These countries, such as China,
Brazil, South Africa and India, are seen as having
tremendous upside and potental for investment,
but at the same tme carrying a lot of risk.
Many large, mult-natonal corporatons that
are not necessarily in the fnance sector may
actually have their own trading division to help
with their internatonal business. For example,
a large constructon frm may employ their own
forex traders so that they can handle convertng
one currency into another when there is a piece
of equipment they need to purchase overseas.
So FX can actually reach into many diferent kinds
of business and knowing how to trade currencies
doesn’t necessarily mean that you’ll only be able
to fnd work at a bank or fund. But besides those
kinds of situatons, the main hubs for FX markets
are: London, New York, Singapore, Hong Kong
and Tokyo. At one bank there will be FX traders
spread out all over the world so that all tme zones
are covered and the desk can take advantage of
moves that may happen when only one market is
open. This is a true 24-hour business, and trading
can take place any tme of the day or night (only
on weekdays; you’ll be happy to hear that markets
are closed during weekends).
Diferent kinds of FX trades
There are diferent ways of trading foreign
exchange and the most common are the following:
Spot – This is the shortest kind of trade that
usually is setled in two days. It’s the most
simple kind of trade as you literally trade x for y
and that’s it.
Forward
We’ve covered forwards in the chapter on fxed
income, but this can play a part in the FX market
too. An exchange rate is agreed but the deal
doesn’t actually take place untl a pre-determined
date in the future.
Future
Again, part of fxed income but also can be used
in trading foreign exchange. It’s like a forward but
more standardised and regulated.
Opton
This is another fxed income instrument used in FX
where you put a trade in place but then have the
opton to back out of it before the date where the
trade would be done. You have the right, but not
the obligaton to go ahead with the trade untl the
contract expires.
Swap
An FX swap is when a trade is done but then
reversed later. So you buy x, sell y and then in
three months you sell x back for y. A swap is
usually achieved by making a spot trade and also a
forward at the same tme.
How to quote an exchange rate
Every currency in the world has a three leter
code. For the euro it is EUR, the code for the
pound is GBP, the US dollar is USD. To quote an
exchange rate between two currencies, one code
will be listed directly afer the other, usually as:
GBP/USD. In this example we’d call GBP the base
currency and USD the counter currency. Afer the
two currency codes there will be a number, for
example 5. If you saw GBP/USD 5 that means that
5 USD = 1GBP (we just used nice round numbers
for this example, it’s not actually the current
rate. If it were, we’d hope that all you Brits would
be too busy living the good life somewhere in
America to be reading this!). In these quotatons
it’s always “how many of the counter currency
make up one of the base currency.”
What afects exchange rates?
The frst thing that can make the value of a
currency rise and fall is something to do with
that country’s politcal system. This can mean
anything from electons, to some kind of scandal
involving government ofcials to a new president/
prime minister/ruling party. Any new party that
is expected to radically change policies or throw
the country into any kind of instability will have
a negatve efect on the country’s currency and it
will weaken. This will also be the case should there
be questons about who will actually lead the
country or who is in charge.
The state of a country’s economy will also afect
the strength of that country’s currency. Any tme
a report comes out about a country’s GDP, budget
defcit or surplus, or a change in economic policy,
you will see the currency of that country move.
Of course the nature of the announcement will
determine which way the currency goes, but any
change or announcement having to do with the
fscal state of a country will afect its currency.
Traders themselves can also infuence forex
markets. If enough traders perceive one currency
to be on the decline, they might pull their
investment in that and invest in another currency
that they think is more stable. That will make the
demand for that second currency higher, but the
frst one will sufer, all because of percepton. This
is what’s called market psychology and is a very
interestng component of the FX markets – trying
to fgure out what people will do when an event
occurs. Successfully predictng this is an important
skill possessed by outstanding traders.
WHAT IS FOREIGN EXCHANGE?
“Knowing how to trade currencies
doesn’t necessarily mean that you’ll
only be able to find work at a bank
or fund.”
“You’ll be happy to hear that markets
are closed during weekends.”
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A typical day goes from 7am to 7pm and
sometimes days can last longer than that,
depending on what’s going on. A former FX
salesperson described their typical day as
consisting of the following tasks:
The first thing I do when I get in to work is read
summaries of what happened overnight and
after I left the office the day before. These come
from news outlets and other colleagues in the
business, either from my bank or others.
Then I take the most important points from
everything I’ve read and write my own summary
of what’s going on and what I think will be
important for the day(s) ahead. The distribution
list for my morning summaries is long as I make
sure that everyone knows what I’m thinking in
case they want to do a trade.
After my summary I get on the phone, which is
a very important part of being a salesperson.
Some of my customers always want to be called
in the morning to discuss what has happened
overnight and my general thoughts, others
might call or email me to discuss anything
they’ve found interesting in my morning update.

Then I make sure to keep reading news
headlines. Bloomberg News is on constantly
so that we can see what’s going on minute-to-
minute. The markets move fast so you can never
ignore the news for too long.
Talking to traders is another important part of
my day. Since they execute orders from me and
my clients it’s important to know what they see/
what they are thinking and always have a good
relationship with them. Sometimes traders and
salespeople can have their differences but not
always; one of my best friends is a trader.
Again, I do another round of calls with
customers, especially if something important
has happened since I’ve been in the office.
Sometimes they call me and ask me to look at
specific things and may ask my opinion on some
issue and then ask me to come up with trades
for that. This is where my creativity comes in
and what makes a salesperson truly good at
their job. The trick is to come up with trades no
one has thought of yet so that your customers
know that they are getting value out of your
relationship and not just the same old ideas
they could get anywhere.
At this point in the day I usually end up doing
trades so I will be communicating with clients as
well as with the trading desk.
By this time the US market is open and it’s
not unusual for something important to have
happened. In that case I’ll call the appropriate
customers again to discuss and hopefully do a
few more trades.
Hopefully it’s a little quiet by this time so I take
that chance to think about what has happened
that day and try to predict what is going to
happen as a result. Again, this is something
extra that not every salesperson does but it
can really add value for your customers and
help you understand the market better. If your
predictions are proven right, your credibility
will skyrocket but more than that it’s going that
extra mile to make sure you’re prepared and if
you enjoy the markets you won’t mind doing it.
I always end the day with more calls to
customers. As a salesperson you can’t be afraid
to pick up the phone and talk markets and you’ll
soon realise that talking to customers is really
the number one duty of a salesperson.
MY 24 HOURS IN FOREIGN EXCHANGE
“You’ll soon realise that talking to
customers is really the number one duty
of a salesperson.”
“Bloomberg News is on constantly so
that we can see what’s going on minute-
to-minute.”
Actually executng 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 fnance, familiarise
yourself with Bloomberg. Before Michael Bloomberg became mayor of New York City, he created
a company that not only specialises in market informaton, but also an important trading
platorm. Everyone on the trading desk (and in sales for that mater) has a Bloomberg terminal,
where they can chat to other traders and salespeople, see market numbers and execute trades.
Many people execute trades over Bloomberg chat (which is just like IM). Some will do deals over
the phone and then confrm the details over Bloomberg chat aferwards. There are other trading
platorms and e-market platorms too where people can execute a trade. Doing a trade via some
kind of electronic platorm is getng more and more commonplace, and over the phone deals
are becoming a thing of the past.
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Sometimes investment banking can seem
abstract - you have to pay attention to how the
“market” reacts to events or you are betting
on which way interest rates will go. You’re not
trading real things you can touch and hold, and
sometimes that can be hard to wrap your brain
around. But one section of an investment bank
that does away with all that is commodities.
What is a commodity?
Commodities are products or goods with a
uniform quality and price across the market.
These can range from everyday items such as
coffee, cocoa or cotton to other goods that
may or may not be part of your daily life such
as gold, oil and coal. Generally all commodities
are grouped as either hard commodities - ones
that are extracted, such as minerals - or soft
commodities - ones that are cultivated by man.
Commodities trading can be fascinating and
can cover a range of products and issues such
as agriculture, energy and precious metals. If
you work in commodities you could be selling
sugar to Cadbury or buying copper on behalf of
a manufacturing giant. It may not get the press
that the bond market or corporate finance does,
but it is just as rewarding and challenging.
How are commodities traded?
Commodities are traded on commodities
exchanges, so that the goods can be regulated.
When a trade is made, there is a contract
produced that details the trade. Sometimes
a commodities trade can be for spot price,
meaning that the buyer agrees to a certain
price for the good and the seller will transfer
that good to the buyer immediately. More
often, though, commodities deals are done
as forward or futures contracts. A forward or
future is when a contract is written up that
states that a good will be sold in the future for
an already determined amount of money. So if
a company that makes soy milk needs to buy
soya beans to make their product, the soya
bean farmer may say that his crop will not be
ready for another five months, but they will
enter into a futures contract where they agree
the amount that the soy milk company will pay
the farmer and they pay it now. The company
likes this because if the price of soya beans rises
in those five months, they won’t have to pay
anything extra as they’ve already locked in the
price. The farmer also benefits from a futures
contract because if the price of soya beans goes
down, he won’t suffer a hit as he has already
negotiated his price.
What’s the difference between a future
and forward?
Though a future and forward is basically
the same thing, they cannot be used
interchangeably. A future is more regulated
than a forward. Futures contracts go through
the exchange so they are very strict and there is
no way either party can get out of or default on
the contract. A forward is less formal and more
of a personal agreement between the buyer
and the seller. Though you don’t have to go
through the exchange, which can be beneficial,
you also don’t have the exchange to back you
if the other side decides they want out of the
contract. But it does mean that you can call off
the trade too if it becomes clear that it will no
longer be in your interest.
Another difference between a future and
forward contract is that forwards, because they
are less formal, are set up so that the entire
order is settled at the agreed upon forward
date. But futures contracts can actually be
settled over more than one date and also at
daily marked-to-market rates. This means that
the fair value of the commodity is calculated at
the end of each day, no matter what rates the
commodity was trading at throughout the day.
Options
Options are also a popular contract in
commodities. This is a contract similar to a
future except that each side has to option not
to go ahead with the contract. Every option
has an expiration date so if neither side wants
to enter into the option before that date, the
contract ends. Analysts often work on complex
models to try to predict how values will move
and if an option will be profitable or not as
trying to determine volatility is an important
part of commodities trading.
Commodities trades don’t work in a bubble
and you’ll have to pay attention not only to
the product you are trading but also things
like weather (if there is a major drought in the
American mid-west, how will that affect corn
prices?), the environment/advances in alternate
energies and how many worldwide products
include things like copper. You’ll also need to
think practically - if you buy a large amount of
oil, where are you going to store it? - which can
make for a very interesting career.
WHAT ARE COMMODITIES?
“If you work in commodities you could
be selling sugar to Cadbury.”
“You’re not trading real things you can
touch and hold, and sometimes that can
be hard to wrap your brain around.”
“If there is a major drought in the
American mid-west, how will that affect
corn prices?”
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Check online to hear what
employees have to say about:
• Life on the Job
• Hours, pay and perks
• Applicatons and interviews
• And more...
WWW.INSIDEBUZZ.CO.UK
34 35
The world of investment banking is full of jargon,
unique words, and exclusive phrases, and you HAVE
to become fuent in this special language if this
is a world you’re looking to inhabit. Two of these
essental I-banking phrases you need to know,
whether you’re aiming for the front ofce, middle
ofce or back ofce, are “buy-side” and “sell-side”
and the diference between the two.
The buy-side
The buy-side is made up of the clients of the
investment bank, which covers lots of diferent
types of companies, organisatons, and everything
in between. They could be individuals, private
companies, pension funds, asset management
funds, proprietary trading desks (prop desks,)
hedge funds or mutual funds. They are the ones
buying the securites, hoping for high returns on
their investments, and that’s why they are called
the buy-side.
The sell-side
The sell-side is the investment bank itself. The
investment bank is the one selling the securites
and investment ideas, so it’s easy to remember that
they are the sell-side. People on the sell-side direct
their clients to securites which they think are in
the clients’ best interest, and which can generate a
proft for themselves too.
The variety of the buy-side
Since so many diferent kinds of companies come
under the umbrella that is the buy-side, let’s take
a closer look at a few and identfy how they’re
diferent from each other.
• Investment/asset management frms:
These frms manage a portolio of stocks,
bonds, real estate – anything – for the investor.
Again, an asset management frm can have a
variety of clients, ranging from pension funds
to companies to individuals. An investment
manager (sometmes called a fund manager)
devises an investment strategy for the client and
keeps them updated regularly with reports and
analysis. Investment management funds are part
of the buy-side because they buy the diferent
products from investment banks to maximise
their portolios. Generally these kinds of frms
deal with longer-term investments.
• Asset management divisions of investment
banks:
Investment banks also have their own asset
management divisions. This is usually where
government enttes and mult-natonal
corporatons turn to manage their investments
and various portolios.
• Hedge funds
Hedge funds follow the same basic idea –
investng clients’ money, hoping to increase that
investment – but are a slightly diferent beast.
Hedge funds are more specialised as some are set
up to only arbitrage, some focus on the general
macro-economic situatons of the world and they
can vary greatly in size. Hedge funds also take
large fees up front from investors and sometmes
even more so than other buy-side insttutons.
To put it bluntly, only the very rich are allowed to
invest in hedge funds because the inital required
investment is usually ridiculously high. Hedge
funds can also short – sell a borrowed asset,
are also less regulated than other investment
management frms and they also tend to perform
leveraged investments where, say a hedge fund
buys 1 billion usd worth of stock only using
100mm usd of actual money, the remainder
being provided by bank loans – something other
types of funds are not allowed to do. If a deal like
that is successful, the hedge fund can actually
make more that their inital investment, an asset
management fund cannot.

What are the specifc roles that make up the
buy-side?
Since the buy-side organisatons are usually less
structured than investment banks on the sell-side,
these roles can vary greatly and a role at one frm
or hedge fund can be totally diferent from the
role with the exact same ttle at the investment
management division of a bank. But generally, buy-
side funds are made up of:
• Analysts:
This is how a lot of people start of in the
investment management world. Analysts will
usually be given a sector, region, or even a
specifc company to research, gather informaton
on, and run investment models about. As an
analyst, you will be expected to know literally
everything about that topic and will be called
upon to recommend investment strategies. It
can mean analysing something as broad as fxed
income or something as specifc as the Argentne
real estate market.
• Portolio Managers:
Sometmes also called fund managers, these are
the people who actually invest the clients’ money
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
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 portolios.
• Investor Relatons:
The IR department does any PR for the frm,
seeks out potental new investors, and keeps
current investors in the know about what you’re
doing with their money. It can be a varied role,
with tasks ranging from event organisaton to
report preparaton to damage control (hopefully
not on a regular basis!).
• Operatons:
These are the unsung heroes of the frm. They
are the technical people who are good with
numbers and can spot that mistake in the trade
order that no one else did. Operatons, or back
ofce roles, can range from IT positons to risk
analysts to the people who make sure the trades
are setled correctly and on tme.
Who’s who on the sell-side?
On the sell-side, you have similar jobs as the buy-
side, but the roles are much more uniform from
bank to bank. Investment banks also have very
structured training programs (some taking place
abroad, which is prety cool as they will pay for you
to do your training someplace like Hong Kong) that
last for a few months where you try out diferent
roles and see which one fts you best.
• Research:
Again, you would be tasked with researching a
specifc sector, product, or locaton and would
be expected to know everything about that topic
and supply reports to more senior analysts with
recommendatons. Many people start out as
analysts and move up afer they have a few years
under their belt.



BUY-SIDE VS. SELL-SIDE: WHAT ARE
THEY, WHAT THE HECK IS A HEDGE FUND
AND WHICH ROLE IS RIGHT FOR YOU?
“You HAVE to become fluent in this
special language if this is a world you’re
looking to inhabit.”
“Investment banks also have very
structured training programs (some
taking place abroad, which is pretty
cool as they will pay for you to do your
training someplace like Hong Kong).”
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• Trading:
During the training program, it will become clear
who will make a good trader and who will not.
If you’re good with numbers and can manage
risk well, then you may start out as a junior on
the trading desk, moving up depending on how
much money you make. There are traders in
all departments of an investment bank trading
foreign exchange, gold, or bonds, just to
name a few.
• Sales:
You also have to be good with numbers to be a
successful salesperson, but you really have to
be a people person with great problem solving
skills. As a salesperson it’s your responsibility to
sell unique products to your clients that will make
them money and also suggest excitng, creatve
trades with lots of upside that no one else has
thought of yet – not a role for the shrinking
violet! Targets for sell-side salespeople can
sometmes be very stressful, but generally the
bank won’t fx you an unatainable target.
• Other:
There is a lot that investment banks do. You could
potentally end up helping on transactons such
as IPOs and M&A deals. When choosing which
investment bank to target for a job, look into
the diferent departments and see if they have
a specialty, maybe that is something you fnd
interestng and you know that would be a great
bank for you.
Buy-side or sell-side – which one is right for you?
Since presumably you are reading this because you
are considering a fnance career, let’s compare both
of these in terms of the job.
• Structure:
Investment banks don’t take deposits, so they use
their own capital and that of investors to make a
proft. This means that by and large if the trades
don’t make money, oops... By contrast hedge
funds charge their investors a high fee no mater
what. So if you’re a fund manager and you don’t
make you clients money on a single investment,
your hedge fund will stll make money and you
will stll get paid, prety sweet, huh?
• Pay:
Traditonally, working at a place like a hedge
fund will get you a beter salary (all those client
fees). But now afer the economic crisis, the pay
scale on the buy-side and sell-side is startng to
even out. Of course both sides compensate their
employees with good basic salaries and bonuses.
Perhaps the main diference in pay is that
investment banks will generally pay part of the
annual bonus in stock of the bank and investment
management frms pay their entre bonuses in
cash. Those shares typically don’t vest (become
yours) for a few years (for example, they could
ofer you a certain amount of stock, which defers
over three years so each year only a third of that
stock becomes yours) so if you’re thinking of
leaving your investment banking job before then,
you’ll have to fnd a new company that will buy
out your stock as part of your new employment
agreement, or you’ll just have to walk away
from it; defnitely a point to think about if you’re
debatng whether to join the buy or sell-side.
If you’re planning on staying at one partcular
investment bank for the long haul, this might
not mater to you. But if you want fexibility
and an easier tme if things turn pear-shaped,
then this will not help. Traditonally, investment
management frms have not done this, but some
are startng to consider it too.
• Stress:
If you don’t already know that stress is an
integral part of any fnance job, then you have
a lot to learn about the sector. Working in any
type of fnancial organisaton means that you
will be stressed out. Even if you work at an asset
management frm, though you will have those
client fees to fall back on, if you don’t make
the clients money they will not be pleased and
could redeem, a.k.a. pull their money out of
your fund, and that is bad. If you decide you
want to become a trader at an investment bank,
colleagues will have access to your books to see
whether you’ve been smart with your trades, or
lost heaps of cash. Salespeople at investment
banks have targets they have to hit and those can
be brutal measures of worth to the bank.
• Hours:
Hours can be insane on both sides, but this
depends greatly on where you’re working.
Traditonally, employees at investment banks
have longer hours and they can be LONG. If you
have to trade with a country on the other side
of the world you’re getng into the ofce at a
ridiculous hour, waking up in the middle of the
night to trade, or having a fun litle sleepover
at your desk. Depending on which markets
you’re working in, you have to be in the ofce
when everything kicks of and those tmes can
vary. Because this is now a truly global world,
there is a market open somewhere at all hours
so the possibility of working round the clock is
real. Working at a place like a hedge fund can
mean more normal working hours, but it doesn’t
exempt you from early starts, long days, and
trades and decisions from home.
• Career advancement:
This depends greatly on your insttuton.
Normally, it has been easier for people to
advance at smaller funds than at large investment
banks. At a smaller fund it may also be easier to
move into another department, if you fnd you’d
like to take your career into a slightly diferent
directon. But that doesn’t mean that there’s
nowhere to go at an investment bank. If you
get an interview on either the buy-side or the
sell-side, make sure you enquire about this, as it
really depends from place to place.
Only you can tell whether investment banking or
investment management is right for you. Don’t
believe every stereotype you hear about the buy-
side or the sell-side, as there are so many diferent
kinds of insttutons, really everything is a variable.
As long as you go with the job that suits you best,
there are no wrong choices.

“Investment banks will generally pay
part of the annual bonus in stock of the
bank and investment management firms
pay their entire bonuses in cash.”
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38 39
So you know you want to work in fnance, but
where? The sooner you know how all of the
diferent places in the investment world link
up, the quicker you’ll be able to picture which
kind of job will suit you best. Here we’ll look at
investment banking (the sell-side) and investment
management (the buy-side), how they’re
diferent, and how they work together to
achieve their goals.
Investment banks are insttutons that raise
capital on behalf of their clients. They can make
this money by doing anything from foreign
exchange trades, where those exchange rates
make them a proft, to interest rate swaps to
purchasing stocks and bonds, or helping to
facilitate M&A deals. Clients of investment banks
can be wealthy individuals, companies, pension
funds, corporatons, mutual funds, governments,
proprietary desks (prop desks), or hedge funds.
Investment banks are called the “sell-side”
because they come up with investment ideas for
their clients and sell them those trades.
Investment management is when someone
manages a portolio of stocks, bonds, real estate
– anything – for the investor. Again, an asset
management frm can have a variety of clients,
ranging from pension funds to companies to
individuals. An investment manager devises an
investment strategy for the client and keeps them
updated regularly with reports and analysis.
Investment management funds are part of the
buy-side because they buy the diferent
products from investment banks to maximise
their portolios.
Since presumably you are reading this because
you are considering a fnance career, let’s compare
both of these in terms of the job.
Structure
Investment banks don’t take deposits, so they use
their own capital and that of investors to make a
proft. This means that by and large if the trades
don’t make money, oops... By contrast investment
management frms, such as hedge funds, charge
their investors a fee no mater what. So if you’re
an investment manager and you don’t make you
clients money on a single investment, your frm
will stll make money and you will stll get paid,
prety sweet, huh?
Pay
Traditonally, working at a place like a hedge fund
will get you a beter salary (all those client fees).
But now afer the economic crisis, the pay scale on
the buy-side and sell-side is startng to even out.
Of course both sides compensate their employees
with good basic salaries and bonuses. Perhaps the
main diference in pay is that investment banks
will generally pay part of the annual bonus in
stock of the bank and investment management
frms pay their entre bonuses in cash. Those
shares typically don’t vest (become yours) for
a few years (for example, they could ofer you
a certain amount of stock, which defers over
three years so each year only a third of that stock
becomes yours) so if you’re thinking of leaving
your investment banking job before then, you’ll
have to fnd a new company that will buy out your
stock as part of your new employment agreement,
or you’ll just have to walk away from it; defnitely
a point to think about if you’re debatng whether
to join the buy or sell-side.
There’s also been a change in pay structure
because of the impact of the fnancial crisis and
in response to the public outcry over those “fat
cat bankers”. Many investment banks are making
some of their bonus payments deferred, usually
for three years. This means that it will be three
whole years untl you get the full bonus amount!
If you’re planning on staying at one partcular
investment bank for the long haul, this might
not mater to you. But if you want fexibility
and an easier tme if things turn pear-shaped,
then this will not help. Traditonally, investment
management frms have not done this, but some
are startng to consider it too.
Stress
If you don’t already know that stress is an integral
part of any fnance job, then you have a lot to
learn about the sector. Working in either type
of organisaton means that you will be stressed
out. Even if you work at an asset management
frm, though you will have those client fees to
fall back on, if you don’t make the clients money
they will not be pleased and could redeem, a.k.a.
pull their money out of your fund, and that is
bad. If you decide you want to become a trader
at an investment bank, colleagues will have
access to your books to see whether you’ve been
smart with your trades, or lost heaps of cash.
Salespeople at investment banks have targets they
have to hit and those can be brutal measures of
worth to the bank.
Hours
Hours can be insane on both sides, but this
depends greatly on where you’re working.
Traditonally, employees at investment banks have
longer hours and they can be LONG. If you have
to trade with a country on the other side of the
world you’re getng into the ofce at a ridiculous
hour, waking up in the middle of the night to
trade, or having a fun litle sleepover at your desk.
Depending on which markets you’re working in,
you have to be in the ofce when everything kicks
of and those tmes can vary. Because this is now
a truly global world, there is a market somewhere
open at all hours so the possibility of working
round the clock is real. Working at a place like a
hedge fund can mean more normal working hours,
but it doesn’t exempt you from early starts, long
days, and trades and decisions from home.
Career advancement
This depends greatly on your insttuton. Normally,
it has been easier for people to advance at
smaller funds than at large investment banks. At
a smaller fund it may also be easier to move into
another department, if you fnd you’d like to take
your career into a slightly diferent directon. But
that doesn’t mean that there’s nowhere to go at
an investment bank. If you get an interview on
either the buy-side or the sell-side, make sure you
enquire about this, as it really depends from
place to place.
Only you can tell whether investment banking or
investment management is right for you. Don’t
believe every stereotype you hear about the buy-
side or the sell-side, as there are so many diferent
kinds of insttutons, really everything is a variable.
As long as you go with the job that suits you best,
there are no wrong choices.
INVESTMENT BANKING VS. INVESTMENT
MANAGEMENT: WHAT’S THE DIFFERENCE
AND WHICH ONE IS RIGHT FOR YOU?
“If you don’t already know that stress
is an integral part of any finance job,
then you have a lot to learn about the
sector.”
“Because this is now a truly global
world, there is a market somewhere
open at all hours so the possibility of
working round the clock is real.”
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CORPORATE FINANCE/CORPORATE VALUATION
How do you value a company?
This is quite a broad queston, so start with the
methods you would use and go through them one
at a tme. It will also impress if you discuss the
pros and cons of each method.
The main ways to value a company are: precedent
transactons analysis, comparable company
analysis and discounted cash fow analysis.
1. Precedent Transactons Analysis
This is when you look at how much others
have paid for similar companies to the one
you are valuing to determine how much
the company is worth. To use this method
efectvely you need to be extremely familiar
with the industry of the company you are
valuing as well as the normal premiums paid
for such a company. This can be a relatvely
easy method to use since all the informaton
is public and thus easy to obtain and also
since the past transactons actually happened,
you can be confdent that analysis based on
this is extremely plausible. But on the other
hand, what if the market during the past
transactons was extremely diferent from
present market conditons? Can you really
base the value of one company on the value
of another that is not exactly the same?
These are some issues you should think about
before your interview so you can discuss them
at length with your interviewer.
2. Comparable Company Analysis
This is similar to Precedent Transactons
Analysis except you are using the whole
company as a comparison unit, not the
purchase of a company. So to use this method
you would also seek out similar companies
to the one you are valuing and look at their
price vs. earnings, EBITDA, stock price and
any other variables you think would be an
indicator of the health of a company.
3. Discounted Cash Flow Analysis
This is when you use future cash fow, or
what the company will make in the future,
to determine what the company is worth
now. To calculate DCF you need to work out
what the projected or future cash fow is for
a company for the next 10 years. Then work
out how much that would be in today’s terms
by “discountng” it at the rate that would give
a return on investment. Then you add in the
terminal value of the company and that will
tell you how much the company is worth.
Though this is the preferred method to value
a company, it stll has its faws because the
projected earning and discounted rate are
fgures that you set using your best guess,
there’s no concrete maths equaton to work
it out so DCF does have a certain amount of
subjectvity to it.
What’s a leveraged buyout?
A leveraged buyout (LBO) is when a company
or investor buys another company using mostly
borrowed money, loans or even bonds to be able
to make the purchase. The assets of the company
being acquired are usually used a collateral for
those loans. Sometmes the rato of debt to equity
in an LBO can be 90-10. Any debt percentage
higher than that can lead to bankruptcy.
EQUITIES
What is a P/E rato?
This stands for price to earnings and simply is the
price of the share divided by the earnings per
share (EPS). This will tell you the price of the stock
related to the earnings of the company. So if a
stock has a high P/E rato that means it’s expensive
as you are paying more for those earnings per
share. If two companies have the same EPS but
one has a higher P/E rato, that one is a more
expensive of the two and means you are paying
more for the same EPS. Ofen the P/E rato as
expressed by saying that a company is trading at
20 tmes its earnings if it has a P/E rato of 20.
What is a PEG rato?
This stands for Price/earnings to growth rato and
takes the P/E rato and then accounts for how fast
the EPS for the company will grow. A stock that
is growing rapidly will have a higher PEG rato. A
stock that is well priced will have the same P/E
rato and PEG rato. So if a company’s P/E rato is
20 and its PEG rato is also 20 some might argue
that the stock is too expensive if another company
with the same EPS has a lower P/E rato, but that
also means that it’s growing faster because the
PEG rate is 20.
Tell me about specifc stocks you like
The interviewer may ask you about individual
stocks or companies and what you think of them.
They may also ask you to “pitch a stock”, which
means you’ll have to pick a company you know of
and make a strong argument as to why investng
in them is a good idea. It goes without saying: if
you are not up on the latest stock news, fnancial
trends, and general business current events, you
shouldn’t be in the interview in the frst place.
Before your interview make sure to take a close
look at a few companies and their stocks, pick two
or three that you would buy. Write down brief
bullet points as to why you would buy them (Are
you impressed with their management? Have they
successfully negotated a tricky situaton? Do their
fnancials look partcularly healthy to you? Do
their insttutonal investors give you confdence?),
a bit about the company and also list some similar
companies that have done well so you can use
them as favourable comparisons. Basically, you
need to know everything about these companies
from why they’ve been in the news lately to
which market factors could afect them. Even
go into detail about their cash fow statements
so you know the company inside and out. Most
importantly, make sure you can argue your point
well and think about how to defend yourself if
your interviewer plays “devil’s advocate” to try
to ratle you. Also do this same exercise for a
few companies you would short. You can
never prepare enough of this specifc kind of
informaton in preparaton for an investment
management interview.
Let’s discuss a company that you think is
undervalued. Why is it undervalued?
Give me an example of a company you think is
overvalued and why.
It goes without saying: if you don’t read up on
the fnancial aspects of multnatonal companies,
the latest industry news or study any trends, then
you will not have a successful interview. Look
into some companies and their stocks and then
decide whether you think they are overvalued
or undervalued. Write down why you think that
along with facts to bolster your argument. Try
to memorise your points but it wouldn’t hurt to
have them with you so you can quickly refer to
them (avoid blatantly reading of the page). If you
can pick out a company whose stock has gone
down based on some bad press, but you’re not
convinced that the bad press is really going to
afect the botom line - that would be an example
of a company that you think is undervalued.
Obviously, go into as much detail as possible.
Any knowledge of the industry, history of specifc
companies and any other knowledge you can
display in your interview, the beter.
FIXED INCOME
What is duraton/Macaulay duraton/Modifed
duraton?
Duraton is a measure in years that not only
measure how the bond will react to changing
interest rates, but also how long it will take for the
fxed income payments to be made
Macaulay’s Duraton is a formula widely used
to calculate duraton and is named afer the
man who came up with the formula, Frederick
Macaulay. This weighted formula has been around
since 1938 (if you are technically-minded and it is
TRICKY INTERVIEW QUESTIONS
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appropriate to the positon you are interviewing
for, you may go into detail about the
actual formula).
Modifed duraton only deals with the queston
of price relatve to fuctuatng interest rates and
does not go into the weighted average of tme
untl repayment.
What is convexity?
This is a more accurate measure of the
relatonship between yield and price changes in
bonds in relaton to the change in interest rates.
Duraton calculates this as a straight line, when in
actuality it is a convex curve, hence the name. This
is used as a risk calculaton because it can tell how
a bond yield will respond to interest rate changes.
Tell me about the diferent kinds of bonds.
Here are a few diferent bonds you should
know about:
• Plain Vanilla – the most simple kind of bond
where everything is spelled out at the start – a
fxed maturity/expiry date, when the principal is
due and how much and how ofen the
interest is paid.
• Convertble – this can be converted into the
issuing company’s stock at a fxed price. Good
for the buyer as it is a bond with an opton to
buy stock if they decide they want to invest that
way. Good for the issuing company as it ofsets
the potentally negatve reason they might issue
stock in the frst place.
• Callable – sometmes also called a redeemable
bond, this is when the bond has a call date,
or dates, when the issuer has the right, not
the obligaton to buy back the bond at a
pre-determined price. To compensate for the
possibility of redeeming the bond before the
maturity date, these bonds have higher coupons
(amount of interest paid to the investor).
FX
Defne risk adjusted rate of returns?
When looking at an investment you cannot simply
look at the return that is projected. If the proft
from investment A is greater than the proft from
investment B you may immediately want to go
with investment A. But investment A might have
a greater chance of a total loss than investment
B so even though the proft may be larger, it is a
lot riskier and therefore not necessarily a beter
investment. Adjusted rate of return is when you
not only look at the return that an investment
may give you, but you also measure the risk of
that investment. The adjusted rate of return is
usually denoted as a number or ratng. If you are
technically minded you may also want to menton
the ways that risk is measured: beta, alpha, the
Sharpe rato, r-squared and standard deviaton.
Would a price of a call opton go up or down
when the maturity of the opton is longer?
In an opton, the price is pre-determined when the
contract is writen up. That is why an opton is so
atractve to both sides – the price is locked in so
that if the price of the instrument in queston goes
down, the seller is protected and if it goes up, the
buyer will get a good deal. So the actual price of
the opton doesn’t change. Whether the market
rate for the partcular instrument goes up or down
depends on the market and can go either way no
mater how long the contract is for. Since a call
opton is to buy a futures contract (a put opton
is to sell one) you would have to be confdent
that the price would rise during the length of the
contract to make the opton proftable for you.
What is the Euro/Pound exchange rate today?
Where do you think it will be in one
year and why?
Obviously you need to keep up on the currency
market at all tmes as it can change in a mater of
minutes. Right before your interview check the
prices of the major currencies (GBP, EUR, USD, JPY,
CHF), the ones that interest you the most and of
course, if the bank or frm tends to focus on one
market or area, make sure you know what those
currencies are doing.
The part of the queston that deals with what
you think about that exchange rate in the future
has to come from your views on the market. Be
prepared to give your opinion and then be able
to back it up with facts, historical evidence and
corollary evidence. This is your opinion so really
there is no wrong answer, but if you are unable to
intelligently artculate why you hold the views that
you do, you will not have a successful interview.
If the Yuan (CNY)/USD exchange rate is 100
CNY/1 USD today and the one year forward rate
is 105 CNY/1 USD, what does this imply?
Since in a year it will take more yuan to equal one
dollar that implies that the yuan is weaker than
the dollar. The dollar is stronger because it can
buy more yuan in a year from now than today.
COMMODITIES
What has fuelled the commodites boom of
recent years and why? What are its implicatons
for the asset management industry?
If you have had any work experience in
commodites, be sure to relate your work to
why you think there has been resurgence in
commodites afer a brief dip due to the credit
crisis. You don’t have to go into minute detail,
but any real world experience you can point to
will be a plus.
Be sure to discuss the rise in emerging market
populatons and why this has had such a strong
impact on the demand of food commodites.
Discuss all of the electronics that everyone has
today (iPads, iPods, mobile phones) and how that
has impacted the prices for metals used to make
those gadgets (menton specifcally palladium,
cadmium, nickel and platnum). Also read up on
what oil is doing before your interview as this is
sure to crop up in your discussion. Think about
the impact that an increased number of people
trading have and how as it’s easier for individuals
and novices to trade, how has this afected the
commodites market.
As for the asset management porton of the
queston, simply think about how you would
advise a client about investng in commodites and
what issues that client would face in doing so. Try
to te in specifc commodites such as gold.
What is the current price of gold, corn,
wheat, etc?
Right before your interview check Reuters,
Bloomberg or another website or newspaper
and jot down the price of major commodites
from precious metals, other metals, food, energy
and oil/fuel. Obviously if you know the role will
focus on one of these categories, focus your
research there.
Have you ever advised your client to invest in
a commodity market and the client has faced
losses afer taking your suggeston? In such
situaton how would you try to cover up the
losses of the client?
This will be a hard queston to tackle if you have
not had any previous experience in the industry. If
you have had work experience, defnitely menton
that, even if you did not directly advise a client.
If you have, be honest about the situaton and
what the result was. If you have never advised a
client, say so, but then add that if you had advised
a client, or if in the future you are advising a client
and that client sufered a loss you would do x.
Don’t say that client losses haven’t happened/
won’t happen to you because you are that good!
Everyone experiences losses at some point in their
fnancial career. What the interviewer is looking
for is how you deal with those difcult tmes. Of
course clients will not be happy with a loss but
how will you make it up to them? What new,
creatve investment have you been working on
that will make them back their money plus more?
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Make sure you highlight how you have/would turn
a negatve situaton into a positve one (and make
sure you highlight your sof skills and your ease at
dealing with clients too).
BUY-SIDE/INVESTMENT MANAGEMENT/HEDGE
FUND QUESTIONS
Why do you want to work on the buy-side and
not the sell-side?
Go back to the chapter on buy-side vs. sell-side
as that can help you start to form your argument.
Maybe you were atracted to the buy-side because
of the wide range of companies you could work
for (such as hedge funds, asset management
frms and mutual funds) or the various diferent
securites you could manage? Maybe you liked
the structure or culture of most buy-side frms
more than the sell-side? They may also ask you
why you’re not pursuing work in consultng. This
is something you’ll have to decide for yourself but
you must come up with a few points to make sure
they know you’re not just going to jump ship to an
investment bank in a year’s tme.
If I introduce a risky stock into a portolio, is that
good or bad?
This is not a yes or no answer. One stock does
not a portolio make; the health of a portolio
depends on all of its parts and how they work
together, or are correlated. Generally stocks that
are negatvely correlated make for a less risky
portolio (so a petrol company and an airline
would be negatvely correlated since when the
price of petrol goes up, it’s good for the petrol
company but bad for the airline as it makes
their cost rise).
On a related note, to be a good investment
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
not do so if hired, rather than convince them that
you are careful, this will convince them that you
won’t make any money for the company. The
amount of risk you’re allowed and encouraged
to take varies from place to place, but you may
as well get used to the idea now that you’re
going to have to take some risk to be a successful
investment manager.
Since you have no previous experience in the
markets, tell me why you want to work here
and why are you interested in investment
management?
This is the most important queston for those
who have decided on a career change or for
those grads who are applying for their frst job.
They are not going to expect you to be familiar
with detailed fnancial models or know advanced
algorithms, but you will have to tell them why
you are interested in the markets, describe what
about following stocks and companies excites
you and highlight which of your qualites makes
you best suited to work on the buy-side. People
in the industry say that when they frst got into
the business, their inital interviewers did not
expect them to know the technical stuf, they only
really looked for people with strong personalites,
enthusiasm and drive – don’t underestmate the
power of those qualites.
MISC/GENERAL
What is an income statement?
This is just a simple record of a company’s gains
and losses, including expenses. The income
sheet represents a specifed amount of tme and
includes everything from the cost of rentng the
ofce to the depreciaton of assets.
What is a cash fow statement?
A cash fow statement tracks the actual cash that
goes in and out of a company. This is important to
see how liquid the company is. If it is rich in assets
but not necessarily cash, there could be problems.
Explain to me what makes up a cash fow
statement
The place to start when looking at a cash fow
statement is the beginning cash balance. Then
you must look at cash from operatons, then the
cash made from any investments, then cash from
fnancing. All of that will make up the ending cash
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...AND MUCH MORE!
AN INSIDE LOOK AT
2013 EDITION
46 47
The investment banking recruitment process
is lengthy and is described as being anything
from “very rigorous” at J.P. Morgan, to “relaxed”
at Morgan Stanley, to both “very tough” and
“rigorous” at Goldman Sachs. Candidates can
expect to face multple rounds of interviews and
are tested on a wide range of diferent skills.
To even get a look in, you’ll most likely need
a good 2:1 from a decent university – though
you’ll need to make that 1st if you are aiming
for Goldman Sachs and some of its closest
compettors. The discipline of your degree is not
important, although a background in fnance,
business or engineering is useful. More crucial
is that you have strong numerical skills in
your arsenal.
Applicatons
Graduate recruitment varies by region, by role
and by scheme, yet you’ll be hard pushed to fnd
a bank that doesn’t use an online applicaton
form as the frst appraisal process during hiring.
There are exceptons; Deutsche Bank and Cit
for instance allow its applicants to atach a
CV, covering leter, references and a record of
academic history. But on the whole banking
applicants have to make their case in the
framework set out in the frms’ forms.
Afer decantng your personal details and
academic history from your CV into the form,
expect a set of competency based questons.
These invariably include posers on your career
choice and academic background. The frms
will also most likely test your knowledge of the
industry – so make sure you stay abreast of
current banking afairs.
Take your tme with your answers, and although
it may sound obvious, make sure that you
actually answer the questons asked – it’s all too
easy to wafe on without getng to the point.
Furthermore, be wary of grammar, syntax and
sentence structure.
Tests
More ofen than not you will be asked to sit
online tests immediately following the submission
of your applicaton. Your score will then join
your applicaton form as a means to assess your
suitability for progression to the next round. If you
make it through to the interview stage, expect
another similar test – set to ensure no cheatng
has occurred.
Typically, investment banks will ask candidates
to sit both numeracy and non-verbal tests. The
former will unsurprisingly be maths based,
but some frms, such as UBS will also include
questons to test your logical ability. Cit goes a
step further, with psychological tests comprising
the earlier stage of its recruitment process. Again,
your logic will be put to the test as well as your
analytcal ability.
As mentoned earlier, the process can vary
according to role – and there’s no beter example
of this than Cit. Those applying to operatons,
technology and HR will have to pass a logical
reasoning test if they hope to make it to interview;
whereas other business lines have to master the
numeric test. With Barclays Capital, hopefuls begin
with an apttude test designed to assess logical
reasoning; only on passing this will applicants sit
the verbal reasoning test.
From frm to frm, the tests will vary in length; but
you can safely expect to be given a tme frame
around the half hour mark. Do not be under any
illusion: if you don’t make the grade you won’t
be invited through to next stage, no mater how
glowing your CV is. To alleviate the pressure on
yourself – make sure you fnd a quiet space and
don’t leave sitng it untl the last minute. Do not
be fooled, practce does make perfect. Practce
sample tests can be found online, so there’s no
excuse for being unprepared! Practce free
-online tests.
Phone Interviews with HR
The frst hurdle many applicants face will be
a screening interview with a member of HR.
A number of frms incorporate this into their
process, including Morgan Stanley, Barclays Capital
and BNP Paribas. Typically these are held over the
phone and last around 40 minutes.
Candidates are normally asked a set list of
questons and will need to explain their motvaton
for applying to that partcular role and that
partcular company. A favourite at Barclays Capital
for instance, is to ask candidates about recent
examples of the company being in the news. With
this in mind, it’s important to stay abreast on
current banking afairs and make sure you know
your CV inside and out.
Phone interviews are no walk in the park. The
lack of face to face contact can make it harder to
communicate and gauge what the employer is
thinking. The key is to focus and concentrate on
communicatng your enthusiasm for the role
over the phone. Furthermore, have a pen
and paper to hand to note down anything of
importance and make sure you prepare before
answering the phone.
Assessment Day
The majority of frms now include some form of
assessment centre in their applicaton process.
The format not only difers from frm to frm, but
it can also difer within a company depending on
the role. However, assessment centres typically
they follow the format used at BofA Merrill Lynch
and Cit: case study, interviews, tests, and group
exercises.
Some frms will throw the odd curveball into
their assessments. UBS for instance drops a
presentaton into the mix. Based on a case study,
candidates will have to prepare a 10 minute
presentaton within only 45 minutes. Even the
best presenters should expect a bombardment of
questons and critcism following their delivery.
Don’t take it personally though – listen to the
comments and argue constructvely and concisely.
Tests will take the form of both numerical and
verbal reasoning examinaton. While these might
not be too difcult, like the online tests, you’ll stll
need to both practce and prepare.
Group exercises will see candidates placed in
teams ranging from two to eight. The standard is
a business related scenario and a tme frame to
discuss it in. Groups are monitored closely, with
frms looking for those that strike the balance of
being heard and leaving others room to put their
points across. Remember, balance is key.
Sometmes assessment centres are broken down
in to two stages. At J.P. Morgan for example,
INTERVIEW ADVICE & TIPS ON
GETTING HIRED
“To even get a look in, you’ll most
likely need a good 2:1 from a decent
university.”
“No firm’s procedure is alike, and
similarly each firm is susceptible to
different things.”
“If you don’t make the grade you won’t
be invited through to next stage, no
matter how glowing your CV is.”
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candidates sit a test, have two interviews, atend
a mixer on one day and then if successful, atend
a second day where they give a presentaton and
face more interviews. Similarly Morgan Stanley
has a two day assessment centre.
Interviews
The style and number of interviews varies
from frm to frm. Initally competency based,
interviews will grill you on your leadership,
creatvity and teamwork. They’ll be the standard,
‘tell me a tme when…’ questons, and the ‘why
this frm/industry/division?’ posers. Later on
the process, interviews will be chiefy technical,
although expect a sprinkling of competencies here
and there. Interviews can represent the bulk of
the process, as is the case with Deutsche Bank, or
they can be the culminaton of an assessment day,
e.g. BofA Merrill Lynch .
At BNP Paribas, candidates face between three
and fve interviews in what is described as a
“collaboratve process”, whereby the frm only
makes an ofer with the mutual agreement
of all interviewers.
Elsewhere, Rothschild follows up a preliminary
individual interview with a panel interview.
J.P. Morgan reviews and tests its candidates in
multple rounds, with candidates facing interviews
by members of diferent business areas. At
Goldman Sachs, a manager says, “the usual
interview topics include candidate’s motvaton
for becoming a banker at the frm, their technical
skills and cultural ft.”
Questons in the interview will vary depending
on the company, the interview stage and the
interviewer themselves. Usually they will be either
competency-based or technical, but it’s best to
prepare for every eventuality. Think about the
reasons for the choices you have made – both
academic and extracurricular – and make sure
your knowledge of the frm and the industry
is up to date.
No frm’s procedure is alike, and similarly each
frm is susceptble to diferent things. At Nomura,
for instance, personality is said to be as important
as ability; while Morgan Stanley are reputedly
especially receptve to enthusiastc candidates.
One of the frm’s associates said “they tried to
see what I was most interested in, capable of and
whether I was good ft.” Lazard looks for original
ideas and a passion for business, and an associate
at J.P. Morgan said that their frm places “a strong
emphasis on communicaton skills.”
The trick is to do your homework. Quite simply,
give the frm what they want, whilst also being
yourself and letng your best strengths
shine through.
Understanding fnancial statements (or accounts)
and how they interplay is fundamental to any job in
investment banking.
Most likely, during the interview you won’t be
asked to perform a detailed accountng analysis of
a company but any bank you apply to will expect
you to be able to review, interpret and comment on
fnancial statements.
The trick to succeeding is frst to understand the
data you’re being asked to analyse and secondly to
be able to link it back to the queston that was given
to you by the interviewer.
Financial statements, put simply, represent all
the relevant fnancial informaton of a company,
presented in a structured manner and in a form
easy to understand. There are four basic fnancial
statements that provide the informaton needed to
evaluate a company. They include:
• The Balance Sheet
• The Income Statement
• The Statements of Retained Earnings
• The Statements of Cash Flows
Here’s a closer look at each:
1) THE BALANCE SHEET
The Balance Sheet presents the fnancial positon of
a company at a given point in tme.
It includes three sectons: Assets, Liabilites and
Equity.
Assets are the economic resources that the company
uses to run its business. They include Cash, Inventory
and Equipment.
Liabilites presents the debts of the company.
Liabilites represent what the company owes, in
other words, the claims that creditors have on the
company’s resources.
Equity reveals the net worth of a company: this
equals the assets that the company owns less the
debts they owe to creditors. Equity can also be
defned as the claims that investors have on the
company’s resources.
In a nutshell, the Balance Sheet represents the
economic resources of a company, including the
claims that creditors and equity holders have on
those resources.
When looking at a balance sheet it’s also important
to understand that companies can obtain resources,
(e.g. cash), from both creditors and investors, and
why the two are diferent. Debts from creditors
are classifed as a Liability, whereas equity from
investors are classifed as Equity.
Companies incur debts from creditors to, for
example, purchase resources necessary to run their
businesses and promise to pay that debt back over a
specifed period of tme, regardless of the operatng
performance of the company. Companies also
look to investors to acquire economic resources.
However, companies don’t promise to pay investors
back a specifed amount over a specifed period
of tme. Instead, companies promise investors a
return on their investment ofen contngent on the
operatng performance of the company. Since an
equity holder’s investment is not guaranteed, it is
more risky that a loan made by a creditor. Debts
owed to creditors are more “senior” than the
investments of equity holders and are classifed as
Liabilites, while equity investments are accounted
for in the Equity secton of the Balance Sheet.
2) THE INCOME STATEMENT
In additon to incurring debt and seeking new
investors, a company can also obtain the resources
necessary to operate its business through its own
operatons. The Income Statement presents the
ANALYSING FINANCIAL STATEMENTS
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ABCS OF INVESTMENT BANKING
ACCRUED INTEREST
A method used in accountng where the interest
either interest you have to pay or interest you are
owed is recorded but has not yet been received or
paid.
ARBITRAGE
Using the price diference of one or two similar
instruments to make a proft by buying and selling
that instrument simultaneously.
ASSET MANAGEMENT
Managing the investment portolio of a client. This
is done either by a specialist fnancial company or
an investment bank.
BALANCE SHEET
Highlights one point in tme to show a company’s
overall fnancial health. The three basic parts
of a balance sheet are: assets, liabilites and
shareholder equity.
BLACK SCHOLES
The mathematc formula on which futures and
optons instruments are based.
BLACK SWAN
This is an event that happens unexpectedly and
cannot be predicted. A black swan is something
that falls outside of any fnancial modelling so no
one knows it is coming. The term was coined by
Nassim Nicholas Taleb because a black swan
is so rare.
BLUE CHIP
A large company that is universally thought
of to be stable. Buying stocks/shares of a blue
chip company are usually considered non-risky
investments and a way to boost portolios.
CHINESE WALL
This is a theoretcal wall that exists in fnancial
insttutons to keep departments that may create
a confict of interest separate. For example, the
corporate advisory team that helps companies
navigate takeovers will be kept separate from
salespeople who try to get their clients to invest in
company shares so that no insider trading can take
place. Recently there has been a movement to
re-name the term so some people call it a frewall
or cone of silence.
BOND
Similar to a loan, the bond is an IOU issued by
a company or government in return for money
provided by investors (bondholders). The issuing
company pays interest on a fxed schedule to the
bondholder and then pays back the principal at
the maturity date. One of many methods of raising
capital, it is a form of debt.
BRADY BOND
These are bonds issued by emerging markets
governments and are a good way to gauge
markets in those countries; most Brady Bonds
come from Latn America.
BUY-SIDE
The buy side is made up of hedge funds and other
asset management companies such as mutual
funds and pension funds. They are essentally
customers of the investment banks who are
buying any trades or investments that the banks
suggest, hence they are called the buy side.
CABLE
Slang term for the USD/GBP exchange rate. It’s
called cable because the exchange rate used to be
communicated by transatlantc cable.
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results of operatons of a business over a specifed
period of tme, (e.g. one month, one quarter, one
year), and includes 3 elements: Revenues, Expenses
and Net Income.
Revenue is the amount of money that a company
receives during a specifc period. It is the “top
line” or “gross income” fgure from which costs
are subtracted to determine net income. Revenue
is generally calculated by multplying the price at
which goods or services are sold by the number of
units or amount sold within a tme period.
Expenses are the opposite of revenue. Expenses
are the costs incurred by a business over a specifed
period of tme to generate the revenues earned
during that same period of tme. For example, in
order for Buzz Snowboards to sell snowboards, it
must buy all the materials needed (wood, plastc,
aluminium, paint, etc.) to make snowboards. Buzz
Snowboard must also pay employees to both make
and sell the product and operate the business. These
are examples of expenses that a company can incur
in order to operate.
So, when is a purchase considered an asset, and
when is it considered an expense?
Assets vs. expenses: A purchase is considered
an asset if it provides the company with future
economic beneft, while expenses only relate to
the current period. For example, monthly salaries
paid to employees for services already rendered
during the month would be considered expenses.
On the other hand, purchasing a computer or
manufacturing equipment would be called an
asset, as it will probably be used for more than one
accountng period.
Net Income: Ofen referred to as the “botom line”,
net income is calculated by taking revenues and
adjustng for the cost of doing business, depreciaton,
interest, taxes and other expenses. This number is
found on a company’s income statement and is an
important measure of how proftable the company
is over a period of tme. A positve net income
number indicates a proft, while a negatve net
income number indicates that a company sufered a
loss, (called a “net loss”).
3) THE STATEMENT OF RETAINED EARNINGS
This statement explains the changes in a company’s
retained earnings over a specifc reportng period.
Retained earnings represent the porton of net
income which is retained by the company rather than
distributed to its owners (as dividends). Conversely,
if the company takes a loss, then that loss is retained
and called variously retained losses.
The Statement of Retained Earnings doesn’t provide
any new informaton not already refected in other
fnancial statements. But it does provide informaton
on what management is doing with the company’s
earnings. Management may be re-investng some or
all of the company’s net income into the business,
distributng some or all of its income to shareholders
(in the form of dividends).
4) THE STATEMENT OF CASH FLOWS
The Statement of Cash Flows shows how changes in
balance sheet accounts and income afect cash and
cash equivalents. Essentally, the cash fow statement
is concerned with the fow of cash in and cash out of
the business and is a useful in determining the short-
term viability of a company, partcularly its ability to
pay bills.
Remember that the Income Statement provides
informaton about the economic resources involved
in the operaton of a company. However, the Income
Statement does not provide informaton about the
actual source and use of cash generated during its
operatons.
That’s because obtaining and using economic
resources doesn’t always involve cash. For example,
let’s say you went shopping and bought a new
snowboard on your credit card in August, but didn’t
pay the bill untl September. Although the store did
not receive cash in August, the sale would stll be
considered August revenue.
52 53
CALL
A type of opton where a trade is agreed to take
place on a certain date in the future for an agreed
upon price. The trade doesn’t necessarily take
place but the right to make the trade does.
CALL PRICE
The price at which a stock or bond can be bought
back by the issuer.
COMMODITIES
Goods that are uniformly traded through a
commodites exchange. Sof commodites include
crops such as grains, cocoa and sugar. Hard
commodites are mined such as copper,
gold and silver.
DEBT
Money borrowed by companies, such as
loans or bonds.
DEBT FINANCING
A way companies raise capital by issuing bonds or
bills. The money is ofen used to expand business
or to buy new equipment.
DEBT SECURITY
An instrument such as a bond or security, that
pays the principal to the lender at the end of the
security. They are usually considered less risky
than an equites security.
DELIVERABLES
This is what you are working towards in any
kind of project, it’s the good or service you are
promising to deliver at the end of a project.
Depending on where you work this could mean
installing a new IT system or creatng a new
fnancial model.
DERIVATIVES
A fnancial product whose value depends on
changing variables. Derivatves include futures,
swaps and optons.
DONE
Said at the end of a trade when the transacton
has been agreed. Once “done” is out of your
mouth, or even if you type it during an
exchange, it is binding and means you accept
the price quoted.
DUE DILIGENCE
The detailed study of informaton about a
company, such as its accounts and actvites, prior
to an acquisiton or take-over.
EBITDA
This stands for Earnings Before Interest, Taxes,
Depreciaton and Amortsaton. Many people
use this metric to value a company when there is
no way to measure EPS, because they have not
issued shares. Some people don’t pay atenton
to EBITDA and actually think it’s the wrong way to
try to value a company because even a company
that’s not in the red can have a good EBITDA
(remember the dot com bubble?)
EMERGING MARKET
A country with a growing economy but one that
usually carries a lot of risk.
EQUITY
Shares in a company.
EQUITY SECURITY
see equity; a company’s stock.
EQUITY DERIVATIVES
A derivatve whose value is dependent on an
equites security.
FANNIE MAE
Stands for: the Federal Natonal Mortgage
Associaton and it was created in America during
the Great Depression. The organisaton does
not lend to the public, but rather is there so that
mortgage brokers and other organisatons that do
give out mortgages have enough money to lend to
people seeking mortgages. The money that Fannie
Mae loans banks and mortgage brokers enables
them to lend to the public at afordable rates.
THE FED
Federal Reserve, more formally, it is the central
bank of the United States. It is run by a chairman
who is appointed by the president. Even if you do
not work in the US, any decision or announcement
by The Fed will afect your market.
FLOTATION
The admission of a new company to a stock
exchange, so that its shares can be traded
publicly. See IPO.
FOOTSIE
Slang term for the FTSE 100, an index of the top
100 UK companies initally started by the
Financial Times.
FORWARD
Contract where sale is agreed for a future date,
but price is agreed and paid today. Less formal
than futures so there is risk of default.
FREDDIE MAC
Stands for: the Federal Home Loan Mortgage
Corporaton, which was founded in 1970. It is
backed by the US government, though it is a public
company. Freddie Mac buys mortgages on the
secondary market, then combines them together
to create mortgage-backed securites, which are
then sold to people looking for an investment. As
of 2008 both Freddie Mac and Fannie Mae were
put under conservatorship of the Federal Housing
Finance Agency in response to the subprime
mortgage crisis.
FUTURES
Contract similar to forwards where trade is agreed
for a future date but price is agreed and paid
today. More formal so contract details must be
adhered to.
GOING PUBLIC
This is what happens in an IPO (inital public
ofering), when a company sells shares publicly for
the frst tme. Companies may choose an IPO as a
way to raise capital. See Floataton
HOSTILE BID
An atempt to acquire a company without the
approval of the target’s shareholders/owners.
INTEREST RATE
A percentage of a loan (the principal) that the
borrower pays to the lender as compensaton for
taking the cash or good borrowed.
IPO
Inital Public Ofering of shares of a company on a
stock market. Also known as a fotaton, it occurs
when the privately owned shares in a company
become publicly traded for the frst tme.
LATE-DAY TRADING
While not illegal, it certainly raises eyebrows. It is
when a hedge fund trades shares of mutual funds
(can be other securites but not ofen) afer hours,
but records the transactons as having taken place
during trading hours.
LONG (POSITION)
When you buy a security of a company you are
long them as you have a view that the value will
rise. In optons you are long when you buy an
optons contract.
M&A
Mergers and acquisitons. The area of legal
practce specialising in advising companies on
merging with, or buying, other companies.
Comprises the bulk of corporate work.
MARKED-TO-MARKET
A fnal price which is fxed at the end of each day.
Considered the closing price; books, balances and
trades must be reconciled with the marked-to-
market price at the end of each day as it afects
the value of trades that day.
MID CAP
Mid-sized company that is smaller than a large cap
(blue chip) company, but larger than a small cap
company. Monetary values that make up the three
categories change from tme to tme.
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MARKET CAP
Otherwise known as market capitalisaton,
this is how some stock indexes determine the
importance or value of a company. You calculate
it by taking the price of a company’s share and
multply it by the number of shares outstanding, in
theory giving the value of the entre company.
MINE
A trading term (mainly in FX) that means buy.
MORTGAGE-BACKED SECURITIES
An investment security that is made up of
many diferent mortgages purchased on the
secondary market. A residental mortgage-backed
security can be purchased by an individual
and a commercial mortgage-backed security
is for commercial propertes. By investng in a
commercial mortgage-backed security, you are
basically lending to a mortgage broker so that they
can give potental homeowners, who may not be
able to aford a traditonal mortgage, a chance to
be a homeowner.
NEGATIVE EQUITY
When an asset dips in price so that the actual
value of the asset becomes less than the
remainder of the loan that was taken out to
secure the asset.
OPTIONS
An investment where you are given the right to a
trade but not a frm commitment that you must
do the trade. This instrument gives you the opton
to do the trade, or not do the trade during the
specifed length of the contract.
PONZI SCHEME
This is an investment scam promising high
returns. Investors are paid those returns not by
the proft made by the investment, but rather
using the inital investment of new investors.
The bigger a Ponzi Scheme gets, the more new
investors they need to keep up the illusion that
the “investments” are yielding high returns. It is
named afer Charles Ponzi, who set up the frst
such scam but more recently Bernie Madof was
in the news for orchestratng a far-reaching
Ponzi Scheme.
PRIVATE EQUITY
An area of legal practce advising on the funding
(through shares or loans) provided by specialist
organisatons to unquoted companies.
PROPRIETARY TRADING
Also known as prop trading. This is when a bank or
frm uses its own money to invest in anything from
commodites to stocks to bonds to currency.
PUNTER
Another word for a gambler (online betng sites
use this term) but specifcally in fnance is one
who speculates rather than trades for
investments to own.
RESTRUCTURING
A way to make a company more proftable by
revamping the framework of a company and
can include the legal, managerial or operatonal
aspects of a company.
SECURITIES
Forms of investment in a company, can either be
shares (equity) or bonds (debt).
SECURITISATION
A method of raising fnance by obtaining loans
that are ‘secured’ against a partcular asset of the
company (asset-backed loan). The loans go into
a Special Purpose Vehicle and therefore do not
appear on the company’s balance sheet.
SELL SIDE
Another name for investment banks; because they
sell investments to hedge funds, mutual funds and
other kinds of investment management frms.
SHORT (POSITION)
This is when you borrow a security, sell it, then
buy it back. You only do this with securites you
think will fall so that you sell it at one price, buy
it back for a lower price and make money on
the transacton.
SPOT PRICE
Price that is agreed and setled usually in two
days. The shortest kind of transacton.
SPREAD
This is the diference between the ask and the
bid, or the price you can sell a security or asset
at and the price you can buy it at. So if you buy
something for a lower price than you can sell it at,
you’ve made money on the spread.
SQUAWK BOX
Intercom stll used on trading desks in banks
and hedge funds so that traders, analysts and
salespeople can communicate instantaneously.
STRUCTURED PRODUCTS
Investment products that can be one security or
a bundle of more than one opton, currency or
commodity that has a derivatve element built in
to give it a diferent risk/return rate.
UNDERWRITING
In fnance, this is when a fnancial insttuton takes
on the risk of selling stock of a certain company
to clients. They are contracted to use their
contacts to bring on people to invest in the issuing
company’s stock.
VENTURE CAPITAL
Money provided by specialist organisatons
to invest in companies not listed on the stock
exchange. Sometmes referred to as private equity
and can be used to fund MBO/MBIs, for example.
WAR CHEST
Stockpile of funds that a company compiles if
they are thinking of purchasing another company
(or part of a company) or are guarding against
a hostle takeover. Can be a good indicator of a
future move or the future of a company.
YOURS
A trading term in FX that means sell.
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Check online to hear what
employees have to say about:
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WWW.INSIDEBUZZ.CO.UK
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ACKNOWLEDGEMENTS
THE INSIDE BUZZ TEAM
Thomas Nut is the founder of Inside Buzz and
previously worked for Vault.com in both New York
and London (where he launched Vault Europe and
served as European MD). His years of recruitment
publicaton expertse keep the rest of the Inside
Buzz team running smoothly and working hard.
When he’s not at Inside Buzz HQ or out and
about with clients, you can fnd Thomas on the
basketball court or travelling around the world.
Hannah Maltby is in charge of editorial at Inside
Buzz, which means she is the one who makes sure
the company profles and employee quotes are
collected, formated, and posted on the website.
When not in the ofce you can fnd Hannah
reading Game of Thrones and rootng for Robb
Stark.
Danielle May works hard to get the Inside Buzz
word out to students and young professionals.
She loves chatng about career choices and the
importance of doing a bit of research before
sending out CVs. When not buzzing, tweetng or
postng, Dani also likes to read Game of Thrones
but roots for Jofrey.
Tom McDermot is the newest additon to the
Inside Buzz team and has a dual role as part of
both the editorial and sales teams. As a fan of
Newcastle United, Tom spends most of his tme
hoping for a return to the glory days of the 1950s.
Gavin Woods has a keen interest in corporate
journalism and currently juggles a Masters in
English with writng and editng for Inside Buzz.
Arthur Guy is Inside Buzz’s infnitely capable web
developer. Known as the master of the Buzz-
matrix, Arthur built and maintains InsideBuzz.
co.uk.
Zoe Coles oversees our design and producton.
She makes our guide and website look good.
And a huge thank you to our guide writer Gabriella Buonassisi

Gabriella works for Inside Buzz as an editor and writer, proofreading copy as well as contributng
several artcles to the Buzz Board. In a previous life she worked in marketng, startng out in New York
at a foreign exchange company and has kept an eye on the markets ever since. She likes reading the
Economist and playing with her Shar Pei, Maya.
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AN INSIDE LOOK AT INVESTMENT BANKING EMPLOYERS
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WHAT YOU’LL FIND INSIDE
How well do you really understand Investment Banking?
Do you know whether you want to work in equites or corporate fnance?
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Know your DCF from your EBITDA? And your speads from your spots?
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