What is Investment Banking

Investment banking is a tradition as old as the Roman Empire and as American as blueberry pie. Economic freedom has led to economic prosperity in the “Land of the Free and the Home of the Brave,” and millions upon millions of Americans are not only citizens, workers, entrepreneurs, and businessmen and women, but they are also investors. Wealth management and wise wealth investment strategies can be as decisive to the economic success of an economy as is wealth creation. Nest your “nest eggs” with the wealth creators. Give more to those who produce more, and they can use it to produce more even than that! And you, having aided them in their successful enterprise, can partake of the bounty! But there is always risk. Beware of poorly run or staffed companies, one-time wonder stock market stars, crooked businessmen who may seek to take advantage of the unsuspecting, and of loss of the value of your dollars due to perpetual inflation. There are risks and there are rewards. Each investor must find a risk-reward balance that they are comfortable with. It is also a good idea to invest in a variety of different places to reduce the risk of losing it all at once. This is the proverbial “not putting all of your eggs into one basket,” and the more suave-sounding “diversifying of your portfolio.” Despite the fact that investment goes on all over the world and has from time immemorial, we Americans have somehow claimed it as a national trait. Let us examine, then, this “American institution.”

Securities (Stocks and Bonds) are the main type of investments. Stocks involve buying a share in a company. With common stocks you gain voting rights in the company, while with preferred stocks you do not. Preferred stocks do, however, have established dividends. Convertible preferred stocks can be changed into common stocks after a specified waiting period. There is no fixed maturation date with stocks, but they can be owned indefinitely. Bonds are a loan to a company. You are the bondholder (loan holder). Bonds will have a fixed maturation date at which point you will be paid back in full, having received periodic interest payments all along the way. The amount you gain from each payment is your “running yield.” The amount you gain in total from the bond investment is the “final yield.” Bond-like investments that are shorter-term are called “CDs.” Bonds can range in term from one to 12 years or even longer. They are a long-term, relatively safe investment as compared with stocks and CDs. If the company goes bankrupt, for example, bond-holders must be paid off before stock-holders. U. S. Savings Bonds are a very safe yet very rate investment.

Money Market-type savings accounts will offer a better interest yield than regular savings accounts, but neither is likely to keep pace with inflation since they usually will pay you only 1% or less interest. The government itself admits to 1% yearly inflation, but it is common knowledge that inflation is higher. Continued access to your money, though qualified by minimum balances and withdrawal number restrictions, may make Money Market accounts a good choice for some in place of a regular savings account. Otherwise, they are not very good investments.

Mutual Fund is a term referring to a company that pools the resources of many investors into one or more security. You can buy stocks and bonds indirectly through such a company rather than directly yourself. If buying from a mutual funds company, however, check to see if it is open-ended or closed-ended. If open, you can sell the securities back to the company at any time. If closed, you cannot. It is also of note that many banks, insurance companies, pension funds, etc. will use some of their funds on hand for investment rather than just having them “sit around doing nothing.” One special type of mutual fund is an IRA (Individual Retirement Account). These are often tax-deferred or tax-exempt. You should investigate the history of the mutual fund company before entrusting them with your life savings- of course!

When investing your hard-earned dollars through investment banking, remember that the reward is usually proportional to the risk. High-yield, quick-paying securities will generally be high-risk. Lower-yield, slower-paying ones will be low-risk. Some few may make a quick fortune through the stock market, but that will take not only know-how but a good dose of luck as well. Most of us will do well to follow a few simple guidelines: know the company you do business with, get an interest rate above inflation and even look at inflation-linked bonds and the like to be extra safe, put some money in easily-liquidateable accounts and others in long-term investments, “diversify your portfolio” to include different companies and both high and low risk options, choose a low risk option for a retirement fund. After you have done all that, all you can do is wait and pray for the best!