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Trading

Mr. Creer — Sat, 25 Jul 2020 10:48:22 +0000

Trading

A Trader is someone who buys and sells something, like a stock, in the financial markets, with the goal of making a profit. There are many different types of “Traders” in the finance world. But first, what exactly is trading?

Keep reading below and you’ll understand exactly what a trader is within minutes.

What is Trading?

“A trade” is simply the action of purchasing (selling) a product from (to) another party.

The objective is to

Buy a product for a low price and sell it for a higher price in order to make a profit or
Sell a product for a high price and then buy it back for a lower price to make a profit

This action often occurs in the public financial markets, which is an electronic marketplace where many traders go to buy or sell things at a publicized price.

Simple, Real Life Example:

To help make clear how a trade works, below is an example of a trade that occurs in everyday life:

Real Life Scenario Example

Zach owns a baseball card he knows he wants to sell. How might he do this?
He could go to a marketplace (for example, eBay) and see how much people are willing to buy it for.
Let’s say he posts the sale of his baseball card for $10 on eBay.
Now, let’s say Rohan wants to buy a baseball card.
Rohan could go to a public marketplace (like eBay) to see if anyone is willing to sell him one for a price he believes is reasonable.
When Rohan sees Zach’s offer to sell the baseball card, Rohan decides it is a fair price and he buys it for $10
He exchanges his $10 for Zach’s baseball card. Zach now has $10, and Rohan now owns Zach’s baseball card.
Zach made this trade because he decided that his baseball card was worth less than $10 to him and Rohan made this trade because he decided that this baseball card was worth more than $10 to him.

Example, continued:

Now that Rohan owns the baseball card, he can sell it to someone else.
Let’s say Rohan approaches his friend Emily and offers to sell the baseball card for $15.
If Emily agrees to buy the baseball card for $15, Rohan will have made a $5 profit on these two trades: He spent $10 to buy the card, and sold it for a higher price at $15. $15-10 = $5 of profit.

Example Of What A Trader Does:

Example of Trader

Varun has done extensive research on “Microsoft”, and thinks it is a valuable company to invest in.
He can go to the public stock market and try to buy one or more shares (aka stocks) of Microsoft.
If Varun pays $150 for a share of Microsoft, he will own a very small percentage of ownership in the company. Why might he do this?
He would do this if he believes the value of the company and thus the value of his newly acquired share(s) would increase over time.
If some time from now, the public stock market’s price for Microsoft increases to, say, $200 per share, Varun can sell his share of Microsoft for a profit ($200-$150 = $50 of profit).
Just like in the above example, where Rohan bought the baseball card with the intention of reselling it for a higher price, Varun can do the same thing with his Microsoft stock(s).

What do Professional Traders/Day Traders Actually Do?

While these examples may make trading sound easy, determining when a product can be bought for a “low” price and then resold at a “high” price is not always as simple as it sounds.

Traders use various skills and tools like fundamental/qualitative understanding of the stock markets and quantitative/computer science programs to help find the best way to “buy low and sell high”.

Different types of traders might utilize different skill sets in order to be successful at their jobs. The different types of products traders trade, and the different types of trading roles are described in more detail below.

What products do traders trade?

A product is simply the type of “asset” a trader is buying or selling. This could be a baseball card, like in the real-life example above, or a stock. While a stock is the most common type of financial product to trade, there are many others.

Here are some common examples of products/”asset classes”:

Stocks/Equities – A small percentage of ownership in a company.
Options Contracts – gives the buyer the right, but not obligation, to buy or sell a stock at a specified price before a certain date in the future.
Futures Contracts – a legal agreement to buy or sell something from another party at a future time for an agreed-upon price.
Exchange-Traded Funds (ETFs) – A fund (aka a collection or “portfolio” of stocks/assets) traded on an exchange (aka a marketplace) like a single stock.
Fixed Income – Bonds, loans, and debt instruments/contracts.
Foreign Exchange (Forex) – Currencies from different countries (USD, Yen, Euro, etc.)
Commodities – like Oil, Natural Gas, Gold, Silver Soybeans, etc.

A trader that buys an options contract, for example, will do this simply because he believes the price or value of the options contract will increase over time.

Most traders specialize in trading one or two products. These financial products can seem a bit complicated but after a little bit of reading none are too difficult to understand. No matter what product a trader trades, the mechanics described above remain mostly the same.

What types of Trader careers are out there?

Some common trading jobs are:

Sales and Trading at an Investment Bank
Proprietary Trading
Hedge Fund/Investment Manager Trading
Commodities Trading

Sales and Trading at an Investment Bank (“Sell-Side Trader”)

Investment Banks have a division called “Sales and Trading”. This division has many types of roles but we will focus on the traders on the trading floor aka “sell-side traders”.

A trader at a bank has these main responsibilities:

Provide advice to clients on a range of topics like stocks, bonds, market conditions, execution of trades, etc.
- An example of a type of client a sell-side trader might have is a Hedge Fund, or an Investment Manager.
Work with clients to buy or sell stocks/products
- Sell-side traders primarily work with their clients to buy and sell products in the financial markets that they might have trouble doing themselves.
- With each trade that they help their client execute, the sell-side trader collects a commission.
Manage their own “risk” in the best way possible.
- Often times, sell-side traders will help their clients complete their requested trades by directly trading with their client. When the trader does this, they are agreeing to take on the risk that comes with making a trade (if you buy and the price falls after, or if you sell and the price rises after).
- Sell-side traders need to make sure that they are managing their own inventory (the products they own) appropriately, and making money on the different products they hold on to overtime.

Sell-Side Trader Tasks, Simplified:

Example: If a client (perhaps someone that works for a hedge fund) tells a sell-side trader he/she wants to buy some shares of Apple, the sell-side trader is responsible for getting Apple stock for his or her client. The sell-side trader will be paid for their efforts in the form of a commission. The trader must obtain the stock in the most cost-efficient way possible (because if they don’t, they risk losing the client in the future). What does cost-efficient mean?

Cost-efficient can mean a lot of things, but some examples might include:

Getting a trade executed at the best possible price
Following specific rules/criteria on an exchange so you do not pay high fees (don’t worry too much about this for now)

What are the ways to execute the client’s trades/order flow?

There are a few ways to help a client complete their trades. One simple way is to go to the public stock markets and buy the requested amount of shares for the client.

This can be done in several ways but three examples are:

If the client wants to buy a product and the bank already owns the stock/product (since they bought it beforehand and have been holding onto it) they can simply sell it to the client.
The client wants to sell a product, the sell-side trader can buy it from their client and manage the risk of owning that stock as they see fit.
If the bank does not own the stock/product, they can go to the public markets and purchase it. Then sell it to their client (usually for an additional fee).

Like all traders, a sell-side trader’s goal is to make as much profit as possible. They can do this by managing their risk (and hoping the stocks and products they own increase in value over time) and/or collecting a commission from helping out their clients with their needs. Clearly, their relationship with their client is important since they want to continue to have their business and make commission in the future.

Proprietary Trading

“Prop Trading” is trading using internal (your own) money/capital. This means that the traders do not have clients, instead they are trading money that belongs solely to the firm they work for. Many larger institutions may have a prop trading division, but there are also prop trading firms whose core business is to trade internal capital and try to maximize profits.

Different Prop trading firms specialize in different types of trading strategies and/or different types of products. Prop traders will use a wide variety of tools/strategies to help them decide when and how to best buy and sell product to maximize profits.

Some Types Of Prop Traders:

You might see proprietary trading firms identify themselves as:

Quantitative Trading Firms – using mathematics and/or computer science to help make trading decisions (when and/or how to buy and sell).
Market Makers – one that always publicizes a price they are willing to pay for a product and a price they are willing to sell that product. Actively trades and tries to make small profits many times per day.
High-Frequency Trading Firms – Firms that invest heavily in high-speed trading technology to allow them to receive and respond to data as fast as possible, and execute trades based on that data.

A prop trading firm can be none, one, or more than one of the above types. For example, there are many prop trading firms who consider themselves “High-Frequency Traders” and “Market Makers” (aka they make markets at very high speeds).

The main difference between Prop trading and other types of trading is that there are no clients, and less restrictions on how you can trade. For example, Banks technically are not allowed to participate in “prop trading” activity due to heavy regulations in place.

The goal in prop trading is simple, make as much profit as possible while also managing your risk responsibly.

Hedge Fund Trading

While trading at a Hedge Fund can take on many different forms, most commonly these traders are Execution Traders. They are responsible for executing the trades decided by the Portfolio Managers or Research Department of the Hedge Fund in the most cost efficient manner.

Usually, if a hedge fund decides to trade a certain product, that decision does not come from the traders, but rather the Portfolio Managers and/or Research Department.

The trader’s job is to make the trade actually happen, and monitor how the markets behave throughout the day (to decide when to best make a trade and to watch how past trades are performing). Like traders at a Bank, Hedge Fund traders are trying to trade in the most cost efficient manner, however, in the case of a Hedge Fund trader, the motivation is to save their own hedge fund money on trade execution costs, rather than directly executing trades for clients.

As mentioned earlier, Hedge Funds sometimes have “prop trading divisions”, but for the most part the traders that work at Hedge Funds focus on execution and managing risk.

Commodities Trading

Commodity Traders can work at many different types of financial firms. However, not all traders work at Finance based institutions. Let’s explain this using an example:

Let’s say I am a Natural Gas (the gas that heats your home) Trader for a retail Energy Company. My job is to closely follow the Natural Gas commodity market and have an understanding of how it should or should not be priced. With this knowledge, I can help decide a few things for the company, such as:

The best time to buy Natural Gas from the suppliers
The price to buy the Natural Gas from the suppliers
How to manage the risk of owning an asset (Natural Gas), which is constantly fluctuating in price. Will need to manage this and “hedge” (or lessen) your risk daily.
- For example, if I own some amount of natural gas, and you told me the value of natural gas was going to fall, I might want to sell some natural gas at a higher price today. I would now own less natural gas, and thus have lessened my “risk” or “exposure” to declining prices.

Example of a risk a commodity trader might have:

An example of a risk that could come up for a Natural Gas trader is “weather risk”.

What is “weather risk”?

In the winter, more people use natural gas to heat their homes and thus there is more demand for natural gas
With more demand, the price of natural gas tends to rise.
However, if winter is colder than expected, demand will decline and the price of natural gas will fall.
It is important for a Natural Gas trader to anticipate this and make sure his/her company is not holding too much natural gas reserves that will now fall in value and be costly.
The “risk” for the trader, is that the weather will change (in a way he/she did not expect) and he/she will lose money as a result.

What kinds of tools does a trader use?

Different traders might use different tools/methodologies to help them trade well. This can vary based on the type of trader you are/where you work. Here are some examples:

Financial Analysis: of a Company to decide when they believe a product is under/overvalued. Buying when undervalued, selling when overvalued.
Quantitative models: can be designed to help predict the price of a product at a future time. Buying if the model tells you the price will increase and selling if the model tells you the price will decrease.
Systematic/Automated Trading Systems: can be created to allow a trader to be relatively hands-off. The system automatically makes trades based on certain signals/triggers that arise in the markets throughout the day. This can help traders make decisions more quickly/efficiently because the system automatically reacts to signals and does not have human error/delay.
High Frequency Trading (HFT): a specific type of automated trading system, which makes trades electronically at very high speeds. The goal is to make trade executions before others get to do it. This is accomplished by spending lots of money to build fancy technology that can receive, process, and react to data faster than anyone else.

How to become a Trader:

The goals of a trader are:

Try to best understand/predict price movements in the market
Make profitable trades
Take calculated risks when deciding what trades to make
Manage their risk responsibly.

Accomplishing these goals can be very difficult, and depending on the type of trader you are, some skills might be more helpful than others.

Here are some helpful skills (in no particular order):

Understanding the product you are trading (how to price it and how the specific market for your product tends to behave)
Quantitative Skills (mental math, probability, statistics, etc.)
Programming Skills (data science languages mainly, to help analyze historical market data or understand trades you have made)
A competitive, problem-solving mentality

Typical Trader Hierarchy:

Unlike most finance-related roles, Trading has a mostly “flat-structure”. Meaning, an entry-level trader will usually sit close to every member of their team, including the most senior people. While younger traders will gain more responsibility over time, they often have the freedom to share their insights to the head of the team from day one.

What are challenges of being a trader?

Trading can be an emotionally stressful job since there will be great days but many bad days (lose money, make bad trades, etc). In general the work of a trader is very results-oriented.
While the pay can be very generous for strong performers, the turnover (especially in prop trading) can be notoriously much higher than most jobs. Poor performance (or lack of good performances, in some cases) often leads to being laid off.
Although some people see it as a positive, it is hard to hide behind your peers and be laid back during work. If you do not perform or provide value, people will quickly see that.

With that being said, being in a highly competitive field can be challenging, but can also be equally rewarding.

What are the benefits of being a trader?

The work-life balance of a trader tends to be quite good, compared to many other finance jobs.
Traders usually work “market-hours” (930am-4pm EST) plus a few more hours before and/or after.
While some trader firms are more competitive or more academic than others, you can get exposure to some brilliant minds. Many (quantitative) traders have mathematics and/or computer science backgrounds and decided they would rather apply their skills to analyzing the financial markets rather than going into a tech-related role or continuing with higher education.
If you are a successful trader that brings a lot of money to the firm, bonuses can be very large. The traders that tend to make the most are ones that “take risk” or make trading decisions themselves, rather than executing trades.
For traders at banks, they deal mainly with clients and take on less risk, so they have less turnover (lay off fewer people). Additionally, a potential benefit to their role is they build strong relationships with their clients.

What is a typical Trader’s Salary?

A typical trader’s salary varies greatly depending on where you work, what your seniority is, and how you perform. An entry-level trader can typically make a total compensation ranging anywhere from $70,000-$300,000, depending where you work. While some proprietary trading firms pay even more than this, it is only a small percentage.

If a top performer, a trader’s salary (usually from bonuses) can increase very quickly. Some firms (mainly prop trading firms) may even pay top performers 7 figures within 5 years, in an attempt to retain their top talent. Prop trading tends to be higher risk, higher reward.

According to wall street oasis, a typical Sales & Trading compensation projection at an Investment Bank looks as follows:

Analyst: $80k – $150k
Associate: $180k – $250k
Vice Presidents: $300k – $500k
Managing Directors/Partners: $1mm+

Should I become a Trader?

Trading certainly isn’t for everyone. Trading can be a very competitive industry, as many firms are competing in the same marketplace trying to accomplish the same goal: make money.

However, if you enjoy following the markets and/or enjoy using quantitative/programming skills to help you problem-solve, trading might be a role you should consider.

Trading is considered a zero-sum game because for each trade there is a winner and there is an equal loser. While not everyone can be successful in the long run at trading, if you find yourself doing well it can be a lot of fun and very rewarding.

Relevant Forum Discussions

Want To Further Discuss Trading?

Trading Job & Interview Preperation

Common Careers Before & After Trading

Related Careers:

Software Engineering

Quantitative Research (Quant)

Investment Banking

Think we are missing important information? Had trouble understanding some sections of this page? Anything else you are still wondering about? Please let us know on the feedback page!

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Investment Banking

Mr. Creer — Sat, 25 Jul 2020 10:47:36 +0000

Investment Banking

An Investment Banker is a type of financial advisor who provides advice to firms on various financial processes. Some examples of these processes include mergers and acquisitions, raising money/capital, etc.

When a company decides they want to sell themselves, buy another company, or raise millions/billions of dollars, this is a massive decision and requires an immense amount of work. Because of this, an investment banker ensures that this process is run smoothly and that the party they are representing achieves the best outcome.

Why can’t a firm just do this without an advisor?

Often times these processes are complex and require access to a network of various contacts. Because of this, clients benefit from having the expertise of bankers who have experience going through numerous similar transactions.

Keep reading below and you’ll understand exactly what an Investment Banker is, within minutes.

What Does an Investment Banker Do? And What Are Their Goals?

The short and honest answer is: an Investment Banker’s goal is to assist their client(s) with financial services in order to earn a fee.

In order to accomplish this, Bankers are paid to advise their clients on “deal” processes. Furthermore, they receive an additional incentive (paid additional money) if the deal successfully closes.

So, in general, the goal is:

What kind of deals? Bankers are advisors to clients on various types of processes/deals. Some of these advisory types are:

Sell-side advisor – advising a firm that wants to be sold to another firm. The goal is to sell the firm for an acceptable price and to a buyer that helps the firm thrive in the long run.
Buy-side advisor – advising a firm that wants to buy another firm. The goal is to make sure the buyer pays the correct price for the target and that the target is the correct fit for the buyer’s acquisition rationale.
Capital Raise advisor – advising a firm that wants to raise money (can sell equity in their company, take out a loan/debt, etc.)

Simple, Real-Life Example:

Real Life Scenario

Below is an example of a buy-side advisory service (provide advice to someone buying something):

Anuke wants to buy a house but has zero knowledge of what a fair price for the house might be.
Therefore, he might want to hire somebody for a predetermined fee to advise him on this financial endeavor.
If Anuke hires Blake to be his advisor, Anuke might offer him $1000 to advise him and $5,000 as an additional bonus contingent on Blake helping him successfully buy the house.
Blake, in this case, has the tools and background to know how to accurately value the house and can advise Anuke on: how to buy it, when to buy it and how much to buy it for.
From Blake’s perspective, he wants to have as many clients as possible, like Anuke, who pay him a fee to advise on certain deals.
Additionally, Blake wants to close as many deals as possible (help Anuke successfully buy the house) since he gets much more money for helping accomplish this feat.

In this case, Blake serves a similar role to a buy-side Investment Bank advisor. While Anuke could be a corporation, the government, or any large entity seeking similar financial advisory services. Certainly, Blake’s advisory services can be beneficial to someone like Anuke, who didn’t know much about the house buying process.

Example of Investment Banker Responsibilities:

Investment Banker Example

Example from Sell-Side Advisor Point Of View:

Company X is a private company and wants to sell. They have an Investment Bank (IB) become their (sell-side) advisor.
1. The IB team usually works with the seller’s CFO, CEO, and finance team to get the necessary information and materials together.
The IB team creates a presentation on the company (the management presentation), the Confidential Information Memorandum (CIM), and a financial model, which reflects the price to sell the company for (aka a valuation).
1. The reason a CIM is created is to ensure that any parties involved don’t spread the news that a sale might be happening before Company X wants the news made public.
The IB puts together a list of potential buyers and starts going out to the parties to see if they would like to purchase Company X (the selling company).
The interested parties receive Company X’s management presentation, the financial model, and some other documents that the IB prepared.
After doing their initial diligence/research on these materials, the interested parties can submit an initial bid (aka the price they are willing to buy Company X for)
Furthermore, there often are multiple rounds of bidding.
The IB coordinates this whole process and creates a lot of diligence items on behalf of the client (for the bidders).
Once the seller picks which buyer they like the most. A deal is signed, and needs to be closed – the final diligence process is done, management decisions are made, bank account details acquired, etc.
Money is wired, the transaction is closed and Company X is officially sold.
Now the IB team usually gets an additional, predetermined, bonus payment, from Company X, for successfully completing the deal.

What Do Investment Bankers Really Do, When Working On A Deal?

You meet/have calls with the company you are advising, and ask them to send you the materials you need to create the required materials (management presentation, financial models, etc.)
- These materials are created by the analyst and associate level employees, and audited/reviewed at the VP/MD level.
IB teams come up with a list of potential buyers/sellers – usually the bank has a lot of contacts that allow them to reach out to companies they think are a good fit.
IB teams are constantly creating materials that are presented to the client or the companies the client is interfacing with. These materials take a lot of time to create and the creation process can sometimes be very repetitive but necessary.
Additionally, you run financial analysis at all stages to understand what price you want to sell at or to justify to potential buyers the price you want to sell at.
- Some model examples are: DCFs, Comps analysis, Precedents, AVP analysis, etc.
You craft the story through the management presentation and other data you provide so that you can maximize value and get the best price for the client.

Types of Investment Banking:

Bulge Bracket (BB) Investment Banks

For a BB bank you are placed in either a Coverage group (industry-focused) or a Product Group (a specific type of service). While a coverage group can be one of many industries, the most common Product Groups are:

Mergers and Acquisitions (M&A) – When a company buys or “merges” with another company. This division advises clients on how to carry out this process and how to price/value the selling company.
Leveraged Finance (LF/LevFin) – Provides advice and loans to private equity firms and corporations for “Leveraged Buyouts” (When Private Equity firms use big loans/debt to buy companies).
Debt Capital Markets – Provides advice on raising debt/loans for acquisitions, refinancing of existing debt, or restructuring of existing debt.
Equity Capital Markets – Provides advice to companies on raising equity capital (stock, warrants, options, etc.). Helps in the IPO process.
Restructuring – Provides advice on the structure of a company, so that it can be more profitable and efficient.

Boutique Investment Banks

If at a Boutique Investment Bank that specializes in a particular Product (or service) you’ll likely be placed on a specific Industry-Focused Team (Coverage Group).

An example of a Boutique Bank is Evercore. Evercore doesn’t specialize in a specific industry (covers many) but specializes (and only offers) two products: M&A and Restructuring.

While BB banks tend to have all of these product groups, boutiques may specialize in a few of these products/services (perhaps within a specific industry as well).

What are the differences between Bulge Bracket (BB) Banks and Boutique Banks?

Bulge Bracket banks refer to the big banks that do it all (such as Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs, and more). Meaning, these banks work across numerous industries and offer a wide variety of products/services. In general, deal teams at BB firms are larger than at boutiques.

Boutique banks are generally smaller, more specialized/focused on one sector, etc. Despite this, many Boutiques have very prestigious reputations on Wall Street. Some qualities Boutique Banks have are:

Smaller teams working on big deals.
More responsibility per person (since fewer people for the same job).
Each person on the team gets a larger piece of the pie (sometimes receive larger compensation than BB).
Additionally, these specialized boutiques can attract clients looking for specific needs/services.

How is a Bulge Bracket Bank structured, organizationally?

Typically, a BB Investment banking division is separated into coverage groups and product groups:

Coverage groups

As the name suggests, these bankers cover industries (like Healthcare, Consumer and Retail, Diversified Industries, Technology Media & Telecommunications (TMT), Power, etc.).
From this, these groups bring industry knowledge (like competitive landscape, industry strategy, etc.) to their services.
Usually work closely with product groups.

Product groups

These bankers have expertise related to a particular product/service and typically work with the coverage groups to help execute deals/transactions related to their particular product.
Some examples of product groups are M&A, leveraged finance, equity capital markets, and debt capital markets (explained in more detail in the next section).
These groups bring the technical product knowledge (experience doing many similar deals/transactions) to the larger deal team.

Some general examples of tools/methodologies an Investment Banker might use?

The main tools are:

Powerpoint – Used frequently to create clean and professional presentations for clients and/or potential companies you interact with.
Excel – Used regularly to analyze financial data and create “valuation models”, which are used to try and determine a price to buy or sell a company for.
Other Office Tools– You are doing a lot of communicating and coordinating with your team and with clients. Knowing business etiquette and conveying your message through a concise email is valuable.

In addition, some tools you might use less often include: Capital IQ, Factset, Thompson Reuters, Bloomberg (learn on the job).

Typical Investment Banking Hierarchy:

What types of skills, mentality, tools are necessary to be a successful Investment Banker?

Attention to detail – A lot of your work revolves around working on Powerpoint decks, and plugging data points into excel spreadsheets/valuation models. As a result, making sure this is clean, accurate and presentable is an essential skill to have.
Ability to work incredibly hard – As an Investment Banker, you work very long hours and many weekends. Consequently, the ability to get things done efficiently and around the clock is very important.
Verbal Skills – Communicating effectively with your team and/or clients is a necessity.
Business acumen – A strong understanding of the industry you/your clients are in allows you to provide better advice to your clients. Additionally, this will help identify where to look for future deals and synergies.
Mental Fortitude – Need to be able to maintain a positive attitude despite a lack of sleep or working with difficult personalities

What are some challenges of working in Investment Banking?

While there are many upsides to Investment Banking, there are also some challenges it is good to be aware of. Some common challenges are listed below:

Investment Banking can be very long hours (70-100 hours per week at times), especially for those that are entry-level.
Some parts of the job (such as material creation tasks) are very menial and tedious.
Limited exposure to operating companies because your job is to advise companies and carry out certain financial processes. It becomes easy to view companies in terms of financial statements rather than a bigger picture.
You may need to deal with some difficult personalities (in terms of politeness and overworking junior employees).

What are some benefits of working in Investment Banking?

Although working in investment banking has some challenges, it also presents many opportunities, particularly for recent graduates. Some benefits are:

Young employees can learn a lot very quickly due to receiving many tasks early on (and keeping busy).
Gain transferable skills like proper email etiquette, how to address clients, how to manage long hours and a lot of work in a short period of time.
A broad range of exit opportunities.
Well compensated
If one chooses to stay in Investment Banking, they have a relatively clear path toward the VP level.
Can build a strong network of individuals throughout the industry, which can prove to be very valuable as one’s career progresses.

What is a typical Investment Banker’s salary?

A typical Entry-Level Investment Banker makes between 80-95k base salaries. On top of this, you can usually make between a 40%-100% bonus (which is a percentage of your base salary). So, if you made a 50% bonus and you had a $100k base salary you’d be making a total compensation of base + bonus = $100k + $50k = $150k.

The total compensation varies typically based on the firm you work at and/or the “bucket”/tier you rank in amongst your Entry-Level Class. With that in mind, a typical pay trajectory (total compensation: base + bonus), based on seniority level, at a bank might look something like this:

Analyst: $100k – $200k
- Typically 2-3 years
Associate: $250k – $400k
- Typically 3-4 years
Vice President (VP): $450k – $700k
- Typically 3-4 years (some may remain at this seniority level)
Director/Senior VP: $500k – $900k
- Depends, but typically 2-3 years
Managing Director (MD): $1 million +

Should I become an Investment Banker?

Investment banking is not for everyone. However, if you can handle long hours and are interested in working with companies you should consider it. Additionally, some added benefits of Investment Banking is the many relationships you build.

After 1-3 years in Investment Banking, you have a wide variety of exit opportunities. Some common examples are: Private Equity, Hedge Funds, Venture Capital, Business/finance focused roles at a non-finance company, etc.

You learn a lot about the broader finance world as an Investment Banker and can transfer a lot of the on the job skills to other fields if you discover the Investment Banking lifestyle isn’t for you.

Relevant Discussion Forums

Want To Further Discuss Investment Banking?

Investment Banking Job & Interview Preparation:

Common Careers Before & After Investment Banking

Related Careers:

Trading

Private Equity

Venture Capital

Think we are missing important information? Had trouble understanding some sections of this page? Anything else you are still wondering about? Please let us know on the feedback page!

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Private Equity

Mr. Creer — Sat, 25 Jul 2020 10:45:00 +0000

Private Equity

As the name suggests, Private Equity firms invest in private companies (or a company not publicly traded in the stock markets). Furthermore these investments are exclusively equity investments, meaning they buy a percentage of a company.

Usually PE firms aim to buy a controlling share of the company (an amount of equity which puts them in charge of the company’s decision-making). They usually aim to buy more than 70% of a company, but depending on the situation it could be a bit less (almost always more than 50%).

A PE company often buys a company, tries to improve it somehow, then sells it some number of years later (5-10 years) for a profit. There are many different types of private equity investments, such as Venture Capital, Growth Equity, and Leveraged Buyouts (LBO). This page focuses on PE firms that do LBOs, since careers titled “Private Equity” tend to be at these types of companies. We will explain what an LBO is in more detail later on!

Keep on reading below to understand PE careers within just minutes.

What Do Private Equity Firms Do?

While the type of company you might buy depends on the type of PE firm you are at/what they specialize in (i.e. Tech Industry, Healthcare Industry, etc), the goal of someone in PE is always to buy a company for a good price, improve the company somehow over the years to generate greater profit (while you own the company), then to resell the company for a profit some years later.

What is a Leveraged Buyout (LBO)?

An LBO is when a PE firm buys a company using debt. Usually, the steps go as follows:

Why is this a good idea? If you notice, the PE firm only put up a very small amount of its own cash (while raising most of the money via debt/loans, aka money from other people). After a number of years, the acquired company pays off the debt (for the PE firm) using its own cash flow. And now the PE firm effectively paid a very small amount to own a majority of this company! LBOs allow PE firms to buy companies for cheap and return a large profit down the road.

Simple/Real-Life Example

Below is an example of a process whose mechanics are similar to a LBO:

Real Life Scenario

If Johnny wanted to buy his friend’s lemonade stand because he’s confident that it would make a lot of cash.
Johnny could raise money to buy the lemonade stand by taking out a loan (or debt).
If Sid believes in Johnny’s ability to pay him back he might give Johnny a loan for $100.
In exchange for giving him this money upfront, Sid requests that Johnny pay him interest payments for a predetermined length of time, until he ultimately needs to pay him back in full (the original $100 “principle” payment).
Sid tells Johnny that he wants to receive a $5 monthly payment (interest payments), for one year, and must receive the original $100 at the end of the year.
Now that Johnny raised $100 from debt, he pays $20 himself, for a total of $120, to buy 100% of the lemonade stand.
If Johnny makes $20 monthly, selling lemonade, he can use that profit to pay his interest payments ($5 every month to Sid).
After the 12 month period, Johnny still has $15 x 12 months = $180 of cash leftover from the profit the lemonade stand provided him (since $20 per month – $5 to Sid = $15 of monthly profit).
Johnny pays Sid the final $100 he owes from his loan and is left with $180 – $100 = $80 and a lemonade stand.
Now, he might resell the lemonade stand, for $140 (slightly more than he paid one year earlier).
After this entire process, Johnny paid only $20 of his own money for this investment and “exited” the investment with $140 + $80 = $220. Not a bad return!

Private Equity Example:

Private Equity Example

PE firm needs to find an investment opportunity. In order to do this, they find a potential company to buy through connections they have, internal research, cold calling attractive companies, an Investment Bank approaches them via a “public auction” for a client they are trying to sell, etc.
Investment teams begin their due diligence process, which includes industry research, speaking with advisors about the company and building the first draft of financial models to find a good purchase price for Company X. Furthermore you build LBO models to project the expected return on this investment years down the line.
Speak with Investment Banks to see how much debt they want to give you for this specific purchase.
Offer Company X your First Bid (offer to buy) and a Letter of Intent (LOI). A LOI is a non-binding agreement, which outlines details about the purchase and what needs to be done to complete the deal.
PE firm builds an operating model, which breaks down revenue projections and costs for Company X, after the purchase occurs. This helps the PE firm get a better idea of what their return on investment (ROI) projections look like.
The PE firm’s investment committee approves the Preliminary Investment Memorandum (PIM), which includes necessary details of the investment and Company X.
Then, they approve the Final Investment Memorandum (FIM), which contains things like the final/specific valuation or purchase price for Company X.
Lastly, the PE firm offers the final binding bid to Company X and signing takes place.

Private Equity Firm Behavior After The Purchase:

The PE firm usually retains ownership of Company X for 5-10 years. During this time, they use profit generated from Company X’s business to pay off the debt they raised from the Investment Banks (step 4 above). Throughout the, say, 5 year span, the PE firm works with Company X and makes sure they are making a consistent profit. This is important because a) this profit ideally pays off the debt b) If Company X becomes a better run company, they are more valuable and can be resold for more profit by the PE firm.

Who does what at a PE firm?

Associates – the junior level employees, usually are responsible for the number crunching via financial modeling. Additionally they do a lot of the initial due diligence for investment opportunities and help with management of portfolio companies (companies the PE firm currently owns).
Vice President-level (VP) – usually manage the daily responsibility of the deal teams and work closely with more senior people at the firm on strategy and negotiations. Additionally, they are expected to bring in potential investment opportunities.
Managing Directors (MD) & Senior Partners – are the decision makers and work very closely with the investment committee. Additionally they are usually the ones communicating frequently with management at portfolio companies, target companies, Investment Banks, etc. They handle most of the negotiations and also are responsible for sourcing future deals (as everyone is).

What is the difference between Private Equity and Venture Capital?

While PE firms and VC firms both partake in “private equity investments” the way they function are a bit different. Below is a breakdown of some general differences between the two:

What types of Private Equity Jobs are out there?

Private Equity Recruiting is a bit more straightforward than some other finance roles. Most PE firms recruit those who already completed a few years of Investment Banking and/or have experience at another PE firm.

The most common types of PE firms sometimes are bucketed into the follow categories:

Lower Middle Market – Invest in smaller companies, typically with valuations between $25mm and $100mm.
Middle Market – Broader range, but typically invest in companies with valuations between $25mm and $1 billion.
Large Cap – Invest in larger companies, with valuations of roughly $1 billion +

Some general examples of tools/methodologies someone in Private Equity might use

LBO Modeling – A model created to assess the transaction and earn the highest possible return. Need to analyze many things like, how much debt you use to buy the company, when you would like to exit, etc.
Diligence – Looking up details on a company and/or the industry they are in.
Powerpoint – Used to create presentations for the target company
Excel – Used to build Financial Models

What types of skills, mentality, etc. are necessary to be successful in Private Equity?

Self-learner – Junior level employees at PE firms are certainly number crunchers but they often take on other responsibilities as well. Learning quickly is essential to becoming a valuable part of the team.
Self-motivated – Many of the responsibilities require you to actively look to learn, contribute and/or help the team find potential investment opportunities.
Modeling skill/background – PE firms usually recruit individuals with Investment Banking experience because they have a few years under their belt and have some financial modeling experience.
Good communication skills – When working on slightly smaller teams it is essential to communicate effectively in order to get things done. Additionally, PE firms constantly communicate with management from their portfolio companies and their target companies (companies the wish to buy); communicating well with these parties can make or break an investment opportunity.

What are some challenges of working in Private Equity?

Tough to break into the industry; usually need at least two years of Investment Banking experience to get into Private Equity
Sometimes there are few opportunities to advance, since the senior partners aren’t going anywhere. So junior level employees might get stuck at a certain seniority-level.
Work can be stressful and long hours, especially when you have an active deal happening.

What are some benefits of working in Private Equity?

Well compensated. Large base salaries and bonuses. Often have “carried interest” as well, which means that you share the profits of the firm (available at more senior levels usually).
Work closely with CEOs, COOs, CFOs, management, etc. of companies. Can help transform a business and gain exposure to exciting business operations.
A lot of different responsibilities – from financial modeling, to industry/company due diligence, to working closely with management of different companies. Can learn a lot about many different things.

Typical Salary?

According to wall street oasis, a typical PE compensation progression looks as follows:

First Year Analyst/Associate: $100K – $250K
Second Year Analyst/Associate: $150K – $300K
Third Year + Analyst/Associate: $170K – $350K
Vice President: $300K – $800K
Managing Director/Partner: $500K – $10MM+

What are some exit opportunities for someone in Private Equity?

The exit opportunities in Private Equity, for the most part, are pretty broad. Anything on the “buy-side” (Venture Capital, Hedge Funds, Family Office, other PE firms) is fair game, along with any business related role.

Additionally, it is common to go back to business school and get your MBA. Once you are in Private Equity, your path might look something like this:

After two years, get an MBA and return to Private Equity (can be the same firm, or a different firm). You usually return to PE as a VP, at this point.
Or, you can get an MBA, and go into a corporate strategy/development role and be more involved in the operations of a business.

Should I go into Private Equity?

Private Equity is one of the most highly coveted jobs on Wall Street. Besides its high compensation, the work is generally viewed as exciting and less repetitive. People often “sacrifice” two years in Investment Banking just so they can enter the world of Private Equity. If you enjoy analyzing companies, learning about different industries, and seeing different ways to improve the operations of a more mature business in order to increase profit, efficiency and cash flow, Private Equity might be something you want to consider.

Relevant Forum Discussions

Want To Further Discuss Private Equity?

Private Equity Job & Interview Preparation

Common Careers Before & After Private Equity

Related Careers:

Venture Capital

Investment Banking

Trading

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Equity Research

Mr. Creer — Tue, 21 Jul 2020 20:36:32 +0000

Equity Research

Equity research professionals are responsible for producing analysis, recommendations, and reports on potential investment opportunities for investment banks, institutions, and/or their clients. Typically, the Equity Research Division is a team of analysts and associates at an investment bank (sell side), an institution (buy side), or an independent organization.

The main purpose of equity research is to provide investors with detailed financial analysis and recommendations on whether to buy, hold, or sell a particular investment. Banks often use equity research as a way of “supporting” their clients, by providing relevant, high-quality information and analysis.¹

What Do Equity Researchers Do?

Firstly, “Equity” refers to a percentage of a company. So “Equity Researchers” do research on companies to gain insight on whether that company is a good one or not. Furthermore, the main task in equity research is providing investment insights to clients, sometimes through reports. These reports range from quick updates (aka “flash reports”) to in-depth, “initiating coverage” reports. Essentially, the job of an equity research associate or analyst is to constantly be analyzing companies and publishing your findings in a clear and concise manner.

Working in equity research is not too different from being a finance-focused university student. There are lots of “assignments” or “papers” due with fairly regular deadlines, such as when a company releases quarterly results (aka an update on how the company is doing and their forward-looking goals) or announces something note-worthy.²

The main components of an equity research report typically include:

Industry research (competitors, trends, etc.)
Overview on Company’s Management and additional commentary/insights
Historical financial results
Forecasting Expected Future Results
Valuation (aka how much you think the company is worth)
Recommendations (on whether to buy, sell, or hold stock in the company) ³

Industry Research

This section outlines trends in the relevant industry for the company you are analyzing. This includes new areas of innovation, information on competitors, political/economic influences that may affect the company’s results, etc.

Additional Commentary And Insights

Here the researchers will provide insights to the company that are less tangible but still very important, such as an overview on the company’s Management. Equity researchers tend to have access to management, and can ask them questions via public conference calls and other occasions. It can be useful to an investor to get a bit of an inside look and opinion on who is running a company and how they are doing/what their vision is going forward.⁴

Historical Financial Results

Equity research is largely responsible for analyzing past financial results of a company and creating financial models to predict how they will perform in the future. Additionally, they must compare a company’s actual results to their predictions, once the time comes, and adjust their forward-looking view on the company as necessary.

Forecasting Expected Future Results

This is similar to the historical results section, but is more forward looking. Based on financial models, the equity research team must attempt to predict future results and defend their thesis with data, mathematical insights, and logical, business-based reasoning. This is important for investors who wish to develop a forward-looking opinion on a company since the only way to guess what will happen in the future is to attempt to make sense of what has happened already.

Valuation of the company

This section is where the equity research team puts a number on how much they think the company is worth. They make necessary assumptions and use various financial models and influential factors to put a price-tag on the entire company.

Recommendations

All of the prior sections lead up to this one. The equity researchers take all necessary information into account and give a recommendation on whether they believe it is a good investment or not. Additionally, they summarize why or why not they believe what they do. Usually these recommendations come in the following formats/language:

Buy = Overweight = Long (aka it’s a good opportunity and you should invest)
Hold = Market Weight = Neutral (aka the opportunity is fine, but not necessarily good or bad at its current price)
Sell = Underweight = Short (aka the opportunity is not good, and if you are already invested you should sell what you own)⁵

Equity Research Real-Life Analogy:

What is the point of Equity Researchers giving reports and/or insights on companies? One way to think of it is through this analogy:

When deciding what to wear for the day, I can turn on the television and watch the weatherman give their daily report. Ultimately they give their weather prediction for the day. That report might end up being inaccurate, but it is their thoughts, based on their expertise. While not everybody chooses to use (or needs to use) the weather report to help them make a decision, it can be very useful for many people!

Typical Equity Research Hierarchy:

This can vary from company to company, but a typical team hierarchy can be seen in the diagram from wallstreetmojo below:

What types of Equity Research Jobs are out there?

Most financial institutions that invest in stocks/equities have some form of equity research. The most common types of companies that have equity research positions are:

Investment Banks (aka Goldman Sachs, Morgan Stanley, Bank of America, etc.)
Hedge Funds
Private Equity
Proprietary Trading Firms
Financial/Equity Research Companies

What types of skills are necessary to be successful in Equity Research?

Analytical Thinking
Able to work well with numbers and data
Organization Skills
Communication Skills
Curiosity
Business-Acumen
Relevant Industry Interest
Writing Skills

What are some challenges of working in Equity Research?

Very competitive to develop accurate opinions on companies/industries
Research Reports can be more political than you think, since analysts are giving an opinion on a company (not always fact)
Can be stressful and difficult completing things within time constraints
Your opinions are often made very public, so you need to be okay dealing with criticism and backlash to your reports

What are some benefits of working in Equity Research?

Get to work with very smart people
Learn a lot about companies and industries
Your name is often attached to reports you publish, which is good for building a name/brand for yourself
Build a network with clients, your team, and sometimes companies that you analyze
Good Compensation
Hours not as bad as some other finance jobs
A lot of exit opportunities (in the investing world)

Typical Salary?

Salary tends to be mostly a base salary (especially early on) and is similar to the Investment Banking base salary (if you work at a bank). This has a wide range depending on your experience, and where you work, but typically is between ~$62k-$140k for total compensation, according to glassdoor.

Entry-level, if you work at a big bank, you can expect a base salary to be around $70k-$85k.

Should I go into Equity Research?

If you want exposure to analyzing companies and industries, and want to create reports and investment-related theses, you should consider a career in Equity Research. Equity research is a great way to learn a lot about the investment research process, and because you’ll have this experience, you will have a lot of exit opportunities in an investment-related field. Some typical. examples are: hedge funds, trading firms, banks, financial research companies, etc.

Relevant Discussion Forums

Want To Further Discuss Equity Research?

Related Careers:

Financial Analyst

Investment Banking

Quantitative Research (Quant)

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Wealth Management

Mr. Creer — Tue, 21 Jul 2020 06:14:00 +0000

Wealth Management

A Wealth manager (WM) is a type of financial advisor that primarily serves high-net-worth and ultra-high-net-worth individuals. And as the name states, they usually manage large amounts of wealth for these clients.

Wealth managers work closely with their clients to offer a variety of services that best meet their specific needs. Some examples of services include:

Investment management
Financial planning
Tax services
Retirement planning
Legal planning
Philanthropic planning (such as charities)
Estate planning and more.

However, not all of these services are necessarily the WM’s responsibility. A client’s needs are the determining factor for which services a wealth manager will provide.¹

What Do Wealth Managers Do?

The purpose of a wealth manager is to make the client’s life easier. Not everyone wants to spend a lot (if any) of their time managing and making sure their money/finances are in good shape. The job of a wealth manager is to help the client manage all of these (sometimes complicated) issues.

Wealth managers typically specialize in topics that relate to highly affluent people with slightly complex financial needs. Rather than seek out multiple professionals, you can work with a wealth manager who coordinates with other experts on your behalf. For example, a wealthy individual who has been married and divorced, owns multiple houses, and has many investments and financial accounts to manage likely needs expertise in topics like: legal matters, property taxes and investments. A wealth manager creates a financial plan that takes each of those needs into consideration, either on their own or with outside help.²

What do you do as an Entry-Level Wealth Manager?

The main responsibilities of an entry-level individual in wealth management varies depending on the company and/or the team you work on. Younger members of a wealth management team support the more senior managers (who are ultimately responsible for the client(s)). Typically the responsibilities can be divided into into two types:

Work related to managing the client’s portfolio (aka a collection of investments and money they have)
Business-Related Tasks

Client Portfolio Work

This typically entails:

Understanding the client’s financial needs and desires
Communicating closely with necessary experts that can help the client accomplish their desires (for example, if they wish to invest in real estate, working with a real estate investment expert).
Closely monitor the investments and financial accounts of your client(s)
Create presentations and reports for your manager and/or the client(s)
Help address client’s concerns and questions as they arise (can sometimes be rather frequent)

Business-Related Wealth Management Tasks

These tasks are anything non-finance related that help the team be successful. Some examples include:

Prospecting and finding new clients and opportunities – this is very important because the more clients they have –> the more money the wealth manager’s manage –> the wealth management team makes more money.
Prepare presentations for prospective clients – explaining why your team/company should be trusted managing their money.
More administrative duties for the team – doing things like binding books, paperwork for onboarding clients, making sure paperwork does not violate any rules, etc.

How do wealth manager’s find new client’s and opportunities?

This can happen in a number of different ways. The prospecting process (aka looking for new opportunities) includes:

Researching, via google or other channels, big events, such as a company being bought -there is usually an individual who benefits from their company getting acquired and now needs their money to be managed
Researching wealthy people in the region and reaching out (either directly or through a connection you may have)
Networking
And any other way you can think of to find more potential business!

What is the difference between Financial Advisors and Wealth Managers?

“Financial advisor” is a general term for many different financial professionals who provide advice on finance-related subjects. A wealth manager usually refers to a specific kind of financial advisor who focuses on topics that concern very wealthy individuals. In other words, a wealth manager usually has a significantly higher investment minimum than other financial advisors.

Furthermore, wealth managers often offer more services than other financial advisors, and aim to be a one-stop shop for a wealthy individual to manage all of their finances, investments, etc.³

What types of skills are necessary to be a successful Wealth Manager?

Communication skills and Personable
Knowledge of different types of investments that your client may need or desire
Research skills
Honest and Trustworthy
Organized
Reliable

What are some challenges of working in Wealth Management?

There can be high turnover since it is competitive to get and keep clients happy
It is important to build relationships with client’s and even their family, so if you do not enjoy socializing like that it can be overwhelming
Results-oriented work, can be rewarding but sometimes stressful and challenging
Client’s can be demanding and get upset if you make a mistake
At the entry-level, the administrative work can get repetitive

What are some benefits of working in Wealth Management?

If you work your way up to being a manager, the compensation is very generous
Build strong, close relationships with clients, and other experts in the finance world
Results-oriented, which can be motivating and rewarding if you perform well
Get to work with and learn from many different types of individuals, across many different teams/specializations.
Work-life balance is usually very good

Typical Salary?

The salary of someone in wealth management varies a lot depending where you work, your experience-level, etc. The typical salary can range anywhere between $65k-$94k, according to salary.com.

According to glassdoor, associates (who are typically entry-level or a few years in) make, on average, ~$60k.

Should I go into wealth management?

If you enjoy working with others, and want to get involved in finance, you should consider a career in wealth management. It is a great opportunity to build many strong relationships and get exposure to different areas of finance, investing, etc. Additionally, it can be extremely rewarding to have the trust of many individuals, their families, and help them accomplish their financial needs/goals.

Relevant Forum Discussions

Want To Further Discuss Wealth Management?

Related Careers:

Investment Banking

Business Development

Account Executive

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Venture Capital

Mr. Creer — Tue, 04 Feb 2020 11:47:27 +0000

Venture Capital

A Venture Capital (VC) firm, like the name suggests, invests capital (money) in business ventures (a startup that intends to make a profit). More specifically, VC firms makes equity investments in early-stage private companies. What does this mean?

Equity investment – The purchase of a percentage of a company.
Early-stage company – A company, like a startup, with a lot of potential to grow in the future.
Private Company – A company that is not actively traded in a public stock market.

VC investing is a form of private equity investing. However, firms titled “Venture Capital” differ from firms titled “Private Equity” because VC firms invest in earlier stage companies.

If you’ve ever seen the show Shark Tank, VC is similar. Of course, VC firms make their investment decisions differently than on Shark Tank. Keep on reading below to understand Venture Capital within minutes.

What is the goal of a Venture Capitalist?

The goal of a VC firm is to find as many profitable investment opportunities as possible. This is done by analyzing prospective companies and deciding whether or not to invest.

Typically, the types of companies VC firms invest in have a “high risk and high reward”.

The risk in this case is investing in a company that ends up not being successful. Since these investments are in younger companies, their future success is not clear yet.
The reward is the large return on investment (aka profit) the VC firm makes if the company does eventually become successful.

For example, if a VC firm invests in 5 companies, and 4 of them fail but the 5th one is the next “Facebook”, they still are very profitable. While VC investments are known to be risky, the best VC firms identify the companies with the highest probability of success.

What do Venture Capitalists do?

Often, the main VC responsibilities are split into the investment process and the post-investment process.

Investment Process:

Below are tasks that need to be completed before making an investment in a company.

Sourcing of (aka finding) potential investments – Via outreach to company CEOs, word of mouth through other VCs, or attending industry events to find promising startups.
Investment due diligence – Research that helps you decide whether an investment is a good one or not. Some portions of research include:
- Financial analysis – Evaluating the value of a company based on its financial metrics (like sales, costs, profit, and other accounting terms).
- Market analysis – Research on the broader market such as size of the market, competitors, target audience/potential users.
- Further research on company – Need to do extensive research on the company before investing in it. For example, understand their product, their management team, and how they operate.

Post-investment aka “portfolio company initiatives”:

After a VC firm invests in a company, this company becomes a part of their “portfolio” and is called a “portfolio company”. Since the VC firm now owns a percentage of the portfolio company, they want to ensure they are run well and positioned to succeed. As a result, VCs work closely with their portfolio companies, even after an investment is made.

VC Investment Process Analogy

Below is an analogy for early-stage VC investing. In this analogy, we relate the VC investment process to investing resources into professional athletes at different stages in their careers. Here, Eric’s choice to invest in a rookie player is similar to a VC firm investing in an early-stage company.

Eric owns a baseball team and needs to fill a specific spot on the roster. (1) a rookie player with a lot of potential but unproven success, or (2) a veteran all-star in the prime of his career.
The younger player costs Eric much less money to hire than the veteran. This can be an attractive route if Eric does not want to spend a lot of money and does not need such a high-caliber player (like the veteran all-star) right away.
While it is riskier to invest in a player who has not proven his success yet, Eric has a team of scouts who study the younger player’s qualities (like his baseball skillset, his work ethic, etc) and determines whether it is a good idea to bet on his future success.
Let’s say Eric signs the younger player to a long term contract. Since he has made this investment he works to develop the player into an all-star.
Eric did not pay him very much but the rookie became very valuable. As a result, Eric’s return on this investment is very high.
Eric’s investment in a young, unproven talent, is similar to an early-stage VC investment since he is making a bet early on in the player’s career. However, in doing so, Eric positions himself to benefit significantly if the player turns into a superstar.

How does the investment process at a VC work?

The structure of this process varies from firm to firm but, below are some general steps:

The process of sourcing investments typically include direct outreach to prospective company CEOs (via email and phone calls).
Furthermore, VC roles have very hands-on networking processes. In other words, entry-level analysts/associates often lead an intro call with a new potential company and act as the first-line filter.
After getting interest/approval from the junior VC employees, typically a more senior team member or Partner gets involved and speaks with the potential company.
Once an opportunity is sourced, there is a constant research process that occurs along the way to an investment.
Finally, the VC team invests if they deem the company a good opportunity.

Portfolio Company Project Analogy

After an investment is made, why would you still work with the company you invested in? Because their best interests are also your best interests. Here’s a simple, real-life example:

Let’s say you invest some money to acquire 25% ownership in a local restaurant. Since you are now a partial owner, you share the benefits of the restaurant’s performance. Chances are, you’ll

want to eat some meals at the restaurant
frequently check in on how they are doing, and
give advice/feedback along the way to help them be successful because their success is your success too.

For example, if your friends order a particular meal and think it is too salty, it is in your best interest to tell the restaurant. Making their food less salty helps make your customers happy and helps you sell more meals!

What is an example of a project a VC firm works on with one of its portfolio companies?

A portfolio company might need some help conducting a thorough market analysis. Meaning, they want to understand who their target users/audience is, who their competitors are, what their competitors are doing, what their potential future users are looking for, etc.

Going through this process helps the portfolio company best prepare to succeed and grow, which benefits both the company and the VC firm. Below is an example of how a market research analysis might look:

Venture Capital Portfolio Company Project Example

“Company X” is a taxi E-hail company, currently only in New York City, evaluating new markets to expand into. Meaning, they want to offer their service to more people or a different demographic (in this case, new cities).
The VC firm communicates closely with the CEO and other management of the portfolio company (“Company X”) to analyze different potential cities.
The VC wants to analyze how large the potential markets are, what makes Company X’s product grow or fail to grow in this market, and which types of users/consumers exist in this market.
So, the VC spends about one week using data sources including industry reports from consulting firms, census data, LinkedIn data etc. to analyze many different potential markets/cities for Company X.
Then, the VC discusses the findings with the CEO and VP of Corporate Development.
As a result, Company X decides to explore a new market: London.
Furthermore, Company X researches competitors that already operate in London.
After the research is complete, the VC and Company X decide if there is an opportunity in London.
If so, they need to present the new findings at the next company board meeting, where important business decisions get approved.

What’s the difference between Private Equity and VC?

What are the different “funding rounds”? (Seed, Series A, B, C)

Funding rounds are when a private company/startup raises money from outside investors. They are chances for investors to invest in private companies (before the companies go public). There are a few funding rounds that occur over the life of a startup. The main rounds, from earliest stage to latest stage, are:

Seed – This is generally the earliest official funding round. Companies often do not even have an established product yet, but usually are raising money before putting their ideas into practice. Even though these companies have not proven their success yet, their seed investors believe in their potential to grow.
Series A – When a startup now has a bit of a track record (has some users and a product). They raise additional funds to help them increase their user base and develop their product(s) further.
Series B – When a startup is slightly more established (aka has more experience under their belt). They wish to expand beyond product development and increase their market reach (become more of a leader in their space).
Series C – At this stage, companies usually have been around for 3-7 years. They are more established, but investors at this round believe they still have plenty of growth potential.

Since companies that are more established and have a proven track record tend to be less risky investments, investing in later funding rounds tend to also be less risky. As a result, it is usually more expensive (need to invest more money) to invest in a company at a later round than an earlier one.

What are some differences between a role at a VC firm that invests later-stage (Series C/”Growth-Equity”) versus early-stage (Seed/Series A)?

The differences depend on the specific firm’s strengths and strategies, however, some common differences are detailed below.

Growth-stage/later-stage venture investing – Compared to an earlier-stage VC firm, research and due diligence processes are more financial analysis heavy because the companies that growth-stage VC firms invest in have a financial track record of 3-7 years. Overall, the due diligence process might include the following portions when evaluating a potential investment.
1. Product analysis – How is the company’s product? Need to analyze the strengths, weaknesses and areas of future growth for the company’s product (and compare it with what else is out there)
2. Market analysis – Who are the current and potential users of the product? How big is the market? Does the company have any competitors?
3. Evaluation of team – How is the company’s management team? Do they seem like they’d run the business well?
4. Competitive analysis – Research major competitors. How is their product? How are their marketing and sales strategies?
5. Financial analysis – Dig into the financial metrics (like their sales, costs, profit, etc.) of the company.
6. Go-to-market/sales & marketing analysis – How is the company marketing their own product?
7. Valuation analysis – Use financial models to find a fair price or valuation for the company.
Early-stage venture investing (Seed and Series A) – Since early-stage companies have less of a financial track record than later-stage companies, the research and due diligence process is more qualitative and focuses mainly on product analysis, market analysis, and the management team than growth-stage venture investing.

Typical VC Company Hierarchy:

While this varies depending on the firm, a general structure looks as follows:

What types of Venture Capital Jobs are out there?

When considering a VC Job there are two questions to consider:

1. What type of companies does the VC firm invest in?

“Types of companies” VC firms invest in can mean:

Industry-focus – some VC firms specialize in a select number of industries, like technology, healthcare, etc.
The stage the company is in – For example, some VC firms make “seed” investments, which are very early-stage investments in companies. Whereas, other VC firms (also called “growth-equity” firms) might make slightly later stage investments.

2. What is your specific role on the team?

“Specific Role” can mean many things, however, one example is your daily responsibilities. For example, some VC firms hire entry-level analysts to specialize in a single task (like sourcing/finding investments or investment due diligence/company-specific research). Whereas other VC firms have their analysts do a little bit of everything. Knowing exactly what your role will be is an important consideration before you take any VC job.

Some general examples of tools/methodologies someone in Venture Capital might use

Powerpoint – for presentations to management and companies
Excel – for managing data, financial analysis, financial modeling, etc.
Capital IQ – for getting public company data
Crunchbase – can see information on companies, and prior funding rounds
AngelList – similar to Crunchbase. Allows VCs to track companies.
LinkedIn – good for networking purposes (and getting additional information on prospective companies).

What types of skills, mentality, etc. are necessary to be successful in Venture Capital?

Curious and Interested – Need to be eager to learn about different companies out there, so you can source strong potential investments.
Entrepreneurial – Having a business savvy mind can be very helpful in identifying winners, and helping portfolio companies succeed after an investment is made.
Creative – Being able to identify winning investment strategies and develop creative business solutions.
Organized – VCs come across potentially hundreds or thousands of companies every year. So, managing all of your work and research in an organized manner is essential to being efficient.
Communication Skills – you need to communicate with management from other companies that you might invest in, with your teammates, and with your portfolio companies.
Knowledgeable of the market – knowing what else is out there, having an idea of trends, staying up to date on current events, etc.

What are some challenges of being in Venture Capital?

Many investments fail – as a VC investor, many of your investments lose money, and working through the losing investments can be difficult.
Working with portfolio companies – sometimes working with portfolio companies (aka companies you’ve already invested in) can be difficult if there are disagreements or the portfolio company is led by poor communicators.
Market Research and Sourcing takes a lot of time – you spend a lot of time reviewing prospective companies to invest in. Most of these end without an investment taking place. However, in order to find the next big winner, it is essential to look for as many opportunities as possible.

What are some benefits of being in Venture Capital?

Although many investments do not work out, the occasional winner can be very profitable for the VC firm and rewarding.
You get exposure to earlier stage companies, which can be very exciting to see how they grow and create world-changing products.
The networking process is very hands-on, which is especially beneficial for entry-level employees.
Additionally, you build strong relationships with companies you invest in, but also your colleagues and other VC firms.
You learn the fundamentals to build and identify successful businesses.
Also, you gain experience trying to predict and invest in future trends.
Compensation tends to be high, but definitely varies depending on the firm.

Typical Salary?

Below are the total compensation numbers for a typical VC firm across different seniority levels:

Analyst – $75k-150k.
Associate – $120k – $250k.
Vice President (VP) – $200k-300k + $0-1million Company Performance Bonus.
Principal/Junior Director – $500k – $700k + $0-2million Company Performance Bonus.
Managing Director (MD)/Partner – $1 million +

Should I go into Venture Capital?

If you are interested in early-stage companies, entrepreneurship, or identifying industry/market trends, you should consider exploring Venture Capital. Venture Capital is one of the most exciting careers, where you gain exposure to high-growth startups and companies that build products for the future.

You learn what makes startups successful, make great connections and you can make a good salary along the way. Furthermore, some common career paths are other VC firms, Private Equity Firms. Startups, Consulting, and Hedge Funds.

Relevant Forum Discussions

Want To Further Discuss VC?

Common Careers Before & After Venture Capital

Related Careers:

Product Manager (PM)

Private Equity

Investment Banking

Think we are missing important information? Had trouble understanding some sections of this page? Anything else you are still wondering about? Please let us know on the feedback page!

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Quantitative Research (Quant)

Mr. Creer — Fri, 31 Jan 2020 01:17:20 +0000

Quantitative Research (Quant)

A Quantitative Researcher (aka a Quant) uses mathematics and/or computer science skills to solve finance/investment related problems.

As financial companies look for different ways to make money and have an edge over their competitors, there has been a rapid shift towards the use of quantitative strategies. Some examples of firms that often have quants are:

Hedge Funds
Other Investment/Asset Management Funds
Trading Firms
Investment Banks
Insurance Companies

Keep on reading below to understand Quant Research within minutes.

What does a Quant actually do?

A quant spends their time researching ways to help the firm succeed. Often times this research involves creating (or improving preexisting) mathematical/computer science models.

What do we mean when we say a “model”? A model is just a system that is created to help replicate a real life scenario (like a miniature model of a house!). Additionally, mathematical models usually have inputs (sometimes called “signals”) and provide the user of the model with an output/answer. Furthermore, over time, when trying to improve a certain model, quants will research new signals to help make the model more accurate.

Below is a typical, simplified example of a model quants design at a financial investment firm:

Investment Firm (like an investment manager, hedge fund or trading firm) Quant Model:

Quants at these firms sometimes build models to determine the price of a stock.
For example, their input to the model might be the name of a stock, and the output would be the “fair price” for this stock.
If the current price on the stock market is lower than the “fair price” the model outputs, it is viewed as “cheap” and the firm buys that stock.
Ultimately, this model tells the firm how it should invest aka buy or sell stock.

While the type of research quants do varies depending on the company, generally speaking, the goal at an investment fund is to discover money-making opportunities, and quants help provide their firms with the tools to do just that.

Why do quants build models? Simple, real life analogy:

Let’s further explain what a model is and why it is useful for a firm through the use of an analogy. The analogy we will use is a basic calculator.

Example:

Let’s break down how a basic calculator works and how that is similar to what a “model” is.
The inputs for making a calculator do what you want are the numbers and the mathematical operation.
For example. If you want to know what 2+2 is, you input a “2”, then a “+”, then a “2”, then a “=”. And the output is your answer, “4”.
Here we can view the calculator as a model. It is designed a certain way to make the user’s life easier (can do math operations quickly and easily).

Just like someone designed and built the calculator to take inputs and spit out an answer, quant builds a model that is designed to give the user answers simply. Building these models (and making sure they work as intended) can take a lot of time, research, and hard work. Furthermore, these complex models can guide firms to make the best decisions possible and help them be successful.

Junior Quant Research Project Example:

There are many different types of research a quant does. Some examples are: finding new signals, improving old signals, improving how signals are implemented (or combinations of those). To clarify, an investment or trading “signal” is usually an input to a model that indicates whether to buy or sell something.

Below is how a quant research project on a new signal often looks at a hedge fund:

Junior Quant Example

Signal generation projects usually originate from senior members of the team.
Senior members give junior quants a write up on some ideas they have and the direction they see the project going.
Also, they provide a lot of relevant academic papers to help start the research process.
The junior quant spends a lot of time researching and asking any questions to senior members of the team along the way.
Every week or a couple of weeks the junior quant presents in informal settings to their boss summarizing their findings. Additionally, they ask questions about the next steps and get feedback.
After the research process is complete, the junior quant comes up with a proposal (aka a thesis) supported by the research.
A Powerpoint presentation summarizing their findings and why it leads them to the specific proposal is given to the entire team plus some senior people at the firm.
After this, feedback and follow-ups are given to the junior quant before approving the proposal.
Finally, the proposal is implemented and the firm uses the research to help them make investment decisions.

Responsibilities of a junior quant researcher:

70% of the time, a quant is working on longer-term research projects. These projects usually require heavy mathematics, computer science, data analytics, etc. and take at least a few months.
20% of the time, a quant will be communicating with their team/other teams and answer any questions others might have on how the model works (since they designed it and are the experts).
10% of the time is spent monitoring past projects, seeing how they perform, and trying to identify areas of improvement.

Some general examples of tools a quant uses:

Mathematics – the specific subject matter depends on the company, but the most common are probability, statistics, and calculus.
Programming Skills – this is usually very important for data analytics and being able to test their strategies.
Excel – to help manage data.
Powerpoint – for making presentations on research.
Academic Research Papers – to help generate ideas for strategies.

What types of skills are necessary to be a successful Quant?

Strong mathematics background – many firms require a graduate degree in a technical subject.
Programming background – being a strong programmer allows you to get the information you need quickly and efficiently. Furthermore, it allows you to do powerful big data research projects.
Creative – a lot of the time, the solution to the problem you are trying to solve has never been found before. You need to be creative in how you approach this process and try to find a solution.
Organized – you spend a lot of time researching, so knowing what you’ve done and what you need to do will help make your research more efficient. Furthermore, you need to present your research to your team when a project is complete and having organized research helps make this more clear for everybody involved.

What are some challenges of being a quant?

It can be hard to find new and successful strategies all the time.
Research requires creativity and you are often on your own. While this freedom is often a positive it can be stressful to take on this responsibility.
Investment strategies constantly need to be improved (a single strategy does not last forever).
If a project has a deadline, hours can become much longer than normal shortly before the deadline.

What are some benefits of being in quant?

Get to work with some of the brightest minds in the world (many have advanced degrees).
Very well-compensated – quants (at investment and trading firms) tend to be some of the best-paid employees on Wall Street.
A lot of freedom to be creative and solve exciting problems.
Learn a lot – you do not need to be the best at every skill right away (as a junior level quant). You often need to be very good at one or two skills and will learn whatever you are missing very quickly. This is made easier (and more exciting) because you learn by doing and working with brilliant people.

Typical Salary?

The average entry-level quant total compensation is anywhere between $90k-$300k. Some companies pay even more than this, but the grand majority fall in this range. The total compensation after entry-level varies a lot depending on performance, experience, and where you work. But, in general, top-performing quants (aka those that help build the most profitable models) are very valuable to financial firms. As a result, these top performers get paid some of the largest salaries and bonuses on Wall Street.

According to ZipRecuiter, the average Quant Researcher makes around $162k per year.

Should I go into Quantitative Research?

If you have a strength and/or passion for problem-solving, mathematics, data analytics, programming, investing, etc. you should consider looking further into quant research. You can learn a tremendous amount and work with some incredibly smart individuals (with very impressive backgrounds) as a quant. Furthermore, the compensation is very strong, so you can be intellectually challenged and paid a lot.

Some typical career paths for a quant include: working your way up the quant ladder (and becoming a manager), switching to a quant role at another company, or any other technical role (like software engineering, data analytics, trading, academia, etc).

If you are interested, we suggest you read a bit about one of the earliest (and most successful) “quantitative hedge funds”: Renaissance Technologies. They are the golden standard for quantitative investment strategies because they are consistently very profitable, and those who build their models are rewarded very generously.

Relevant Forum Discussions

Want To Further Discuss Quant Careers?

Quant Job & Interview Preparation

Common Careers Before & After Quant Research

Related Careers:

Trading

Investment Banking

Software Engineering

Think we are missing important information? Had trouble understanding some sections of this page? Anything else you are still wondering about? Please let us know on the feedback page!

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