Investment banks serve two major constituencies: organizations that need capital in order to operate and institutional investors that have capital to invest. When people refer to investment banking they are typically referring to either the Corporate Finance group or the Mergers & Acquisition group within an investment bank. Corporate Finance helps companies raise capital through debt and equity. M&A advises a corporation in the process of merging with, acquiring, or selling a business. Most investment banks organize themselves on three dimensions: functions, products, and clients.
Investment banking is a relationship business. Investment bankers build long-term relationships with large corporations in the hope of acting as their advisor on all financial matters. For their guidance in raising cash or negotiating a merger, investment bankers earn fees based on a percentage of the total sum of money that changes hands.
Corporation Finance is either a divisional or functional area within a corporation dealing with financial responsibilities relating to Treasury, Operations, Marketing, or Accounting. In a Corporate Finance position, an MBA may be responsible for modeling, special project analysis, merger/acquisition analysis, debt/equity structuring, management of cash reserves, budgeting, financial planning, strategic analysis, and accounting issues.
Portfolio managers hold stocks, bonds, and other assets (real estate, derivatives, etc.) for institutional and individual clients. Because they are the end consumer of investments and research, they are referred to as the "Buy Side" of Wall Street. Depending on the size and composition of the assets under management, portfolio managers use strategies ranging from strictly quantitative, to passive (indexing), to active management.
All major investment banks have sales and trading departments. These departments serve two clients: their own bank, for which they trade to make money, and their clients, whose investing and trading needs they serve.
Traders and salespeople have a mutually beneficial relationship. Salespeople provide traders with information on investment opportunities and market demand for securities. Traders provide salespeople with price quotes on securities and provide liquidity to the latter's customers by buying securities they want to sell. Salespeople earn commissions when a trader makes a trade on information they have provided.
This is a division within a bank that concentrates on managing the assets of high net-worth individuals. A career in PCS requires a strong interest in sales and the financial markets. It can be a highly rewarding field, but compensation is almost totally dependent on individual performance. After the first two years, the pay is linked exclusively to fees generated on a percentage of client assets managed.
Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. Categories of private equity investment include leveraged buyouts, venture capital, growth capital, angel investing, mezzanine capital and others.
Private equity firms are managed by individuals known as general partners who will make direct investments on behalf of the limited partners, or those who contribute capital to the fund. General partners are generally compensated with a management fee, defined as a percentage of the fund's total equity capital, as well as carried interest, defined as a percentage of profits generated.