Factors that affects cost of capital in businesses How to Become an Investment Banker Definition Types Of Risk In Finance

How to Become an Investment Banker

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As the world recovers from the economic depression witnessed in the 1930s, the demand for investment bankers is also increasing once more.

This means that investment banking is among the most promising and lucrative careers of the 21st century.

However, some people don’t even have the slightest idea on how to become an investment banker.

We have some helpful tips to set you on the right path to becoming a talented investment banker.

How to Become an Investment Banker (1)

  • Job Description

An investment banker acts as a representative of a financial institution that works with other corporations, individuals or government institutions to invest in stocks, hedge funds or bonds.

An investment banker also assists with the mergers, IPOs or acquisitions.

  • Right Academic Qualifications

To become an investment banker, you should either have a Bachelor’s degree or a Master’s degree in business administration.

However, other degrees such as finance, accounting or mathematics are also accepted.

  • Required Training

Since investment bankers come from a variety of backgrounds, they are usually taken through a vigorous training session that lasts for weeks.

Fresh graduates are enrolled as interns and assigned a mentor for six months before they are finally allowed to handle crucial assignments.

  • Licence and Certification Requirements

Once absorbed, the investment banker has to register as a representative of his or her company by the relevant authorities such State Security Agencies.

In most cases, an investment banker must pass a series of examinations before being registered. Luckily some firms guide their new recruits through the whole process thus making it simple.

  • The Salary of an Investment Banker

In the United States, the US Bureau of Labor Statistics groups investment bankers into categories under which their salary scale is determined.

Investment bankers under securities and commodities earn an average annual salary of $71,500. However, since most investment companies give bonuses to their employees, these figures can rise to $100,000 per annum.

  • Finding a Job as an Investment Banker

If you want to land a very good job, you should be good at networking while still in schoolHow to Become an Investment Banker (3)

Many financial institutions usually recruit from top business schools or absorb interns who have worked with them.

If you didn’t attend a top business school, then you need to tap into networking a lot.

You can also look up for vacancies from various online job hunting platforms.

Ensure you are ready for interviews all the time.

  • Stay Informed

Don’t be shy to read and interpret various financial presses and journals on a daily basis.

This will keep you abreast with the current economic trends and also sharpen your analytical skills.

If you follow the steps stipulated above, I guarantee your skepticism on how to become an investment banker will be replaced with confidence and the willpower to venture into this career path.

Factors that affects cost of capital in businesses

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Cost of capital refers to the amount of capital used to finance a business.

Factors that affects cost of capital in businesses (1)

The cost of capital usually depend on the mode of finance that has been used.

For instance if the business is financed solely through debt, then that is referred as cost of debt. On the other hand, if the business is financed through equity, then that is referred to as cost of equity.

In most cases, companies usually use a combination of both equity and debt to finance their business. Cost of capital usually represent the hurdle that the company or business must overcome in order to generate profit and as a result, it is usually used in capital budgeting to determine if the company or business should proceed with the projects or not.

The cost of capital sources usually varies from business to business depending on factors such as profitability, credit worthiness, operating history among many others.

This means that businesses which are still new have higher cost of capital than businesses that have already established themselves on the market.

In this article, we are going to focus on factors that affects cost of capital in businesses.

1. Current economic conditions

If current economic conditions are good, financial institutions can easily give loans at lower interest to companies.

This will in turn lower the company’s debt which is actually part of cost of capital. On the other hand, if there is a big recession in the market, many financial institutions will give loan at high interest rate meaning that the company’s debts will increase, increasing the cost of capital.

Therefore, if there is stability in the market, the cost of equity capital will increase and cost of debt will decrease.

2. Current dividend policy

Every business has its own dividend policy. The business must determine the total amount of earning that is willing to pay as dividend.

It is therefore very important to understand the concept of price earning ratio. If the price earning ratio increases, they cost of retained earnings will decrease. This is because the money that has been retained to be used to promote the business will be subtracted.

3. Financial and investment decisions

The financial and investment decision that a company makes also affects the cost of capital.Factors that affects cost of capital in businesses (2)

For instance, when a company gets new debt or share capital, it will have to inform the investor about the usage of that particular fund.

Therefore, if there is more risk to that particular investment, the creditors and shareholders will get higher reward, a factor that will affect the cost of capital.