A career in finance encompasses more opportunities than you might expect. When most people think of finance they think of Wall Street, but the kinds of jobs you see in movies like ‘Wall Street’ or ‘The Wolf of Wall Street’ actually represent a minority of finance jobs.
Finance careers are all about money, literally. Finance is, at its core, about the valuation and allocation of capital (just another term for assets or cash). Individuals need to decide how to allocate their personal savings. Companies need to know how to allocate capital between projects, as well as how to raise capital. Governments need to allocate capital between spending programs and projects. Insurance companies need to allocate the monthly payments of their subscribers in order to pay off future liabilities.
Careers in Finance generally work on the following problems of capital valuation and allocation:
- What is something worth? That something could be a company, an asset, a project, or a combination of the above.
- What is the ideal allocation of capital between a set of options?
- What type of capital should be raised (most capital that people use is either debt or equity, though there are other types)?
- How can I pair a provider of capital (an investor) with a user of capital?
Buy side vs. Sell side
When people talk about finance careers, they often distinguish between the buy side and the sell side. One way to think about this distinction is that with any financial transaction, there is usually a buyer and a seller, and there are professional representatives on both sides of that equation.
Careers on the sell side include investment banking, commercial banking, and sales and trading. These people represent clients who are trying to raise money, or in other words, "sell" part of their business in exchange for financing.
Careers on the buy side, on the other hand, mostly include asset managers like private equity, hedge funds, and institutional investors. These people buy the financial assets made available by the sell side.
As with any arrangement with a buyer and seller, you can imagine that typically the buyer has a lot more leverage and power in the relationship. And so, it's often the case that working on the sell side puts you at the mercy of those on the buy side. This typically means worse hours, unpredictable schedules, and frankly more schmoozing.
Well, that's enough of an introduction. Let's jump in. This guide is intended to give you an overview of careers in finance to help jumpstart your exploration of the industry. If you want to learn which career in finance might be right for you, try taking our free career test!
Investment banking (or i-banking, colloquially) is a client service business. Clientele are usually made up of large businesses, for which investment bankers primarily provide two services. First, they help companies raise money in the form of debt or equity. And second, they help companies acquire or merge with another company.
What do investment bankers do?
As an investment banker, your job is usually twofold:
- Determine how much a company or an asset is worth
- Sell that company or asset on the open market
The job of a junior investment banker typically deals with the first side of the equation: valuation. For instance, as a junior banker, you are often asked to develop presentations that summarize a company's business, analyze its financials, and present a perspective on its valuation. This requires combing through financial statements, reading press releases, looking at financial metrics of competitors in its industry, and finally developing financial models to assess the value of that business. Not surprisingly, the work involves considerable use of Excel and PowerPoint.
After a few years of doing this, you might get promoted to a more senior investment banker position at the Vice President level or above. In this capacity, you start to work on the client-side of things: building relationships with businesses and potential clients as well as meeting prospective investors (aka people with money). Your job as a senior investment banker is effectively matchmaking. When a business retains your services, you essentially become their evangelist in the marketplace. Whether they want to raise money or acquire another business, you go out and ‘pitch’ that business to the market. The job of an investment banker, therefore, is in some ways akin to being a very specialized and sophisticated sales person. For this reason, in the finance world, investment banking is often considered ‘sales side’ (versus ‘buy side’).
What's the lifestyle of an investment banker like?
The hours of an investment banker are, simply put, brutal. When you are working on a deal – a potential acquisition or merger – it's not uncommon to work 70 to 100 hours a week. Some bankers have reported sleeping under their desks while they wait for input from their seniors! So, if you're thinking of a career in banking, you might want to invest in some comfortable suits.
What's the pay of an investment banker like?
While the hours can be horrible, i-bankers are paid well for their efforts. A junior banker at a top firm can make over $150,000 in their first year. Typically, this is paid out in a sub-six-figure salary and a large bonus depending on the performance of the firm. Senior level salaries range from $500,000k to $2,000,000.
When people think of the finance industry…
…investment banking is usually what comes to mind first. There are a few reasons for this. First off, most of the major firms on Wall Street, like Goldman Sachs, started off as investment banks. Secondly, in the world of high-end finance careers, investment banking is often the ‘entry level’ career. It is the proverbial foot in the door onto Wall Street.
Where do most investment bankers work?
Investment banking tends to be dominated by large, global companies like Goldman Sachs, JP Morgan, Bank of America Merrill Lynch, and Morgan Stanley. Despite this dominance, there are several small and boutique investment banks as well. These boutiques usually focus on smaller deals in specific industries. Not unexpectedly, the bulk of investment banking jobs are centered in global financial capitals, the top five being New York, London, Hong Kong, Singapore, and Shanghai.
How do private equity firms make money?
The private equity sector of the finance industry invests in private businesses; not in ‘public’ equity, which is the stock market. As a comparison, hedge funds are more focused on investing in public equity. Another defining characteristic of private equity firms is that they usually do not invest their own money; instead, they invest on behalf of wealthy individuals and institutions. They receive a percentage of the profits they generate along with a percentage of the total fund size annually.
With a view to achieving greater profits, this sector is always on the lookout for businesses in need of a fix or a turnaround. While valuation is important, private equity is typically more focused on business operations and the opportunity to sell for a higher price in the future. For that reason, more than in other finance careers, private equity often involves actually building and operating businesses. This is done by targeting businesses to acquire and then replacing their management with either in-house experts or consultants.
Once a private equity firm identifies a business with a potentially large upside, it usually purchases a majority stake in it. Potential upside is often identified in actual, current shortcomings or ‘downsides,’ such as these:
- Lazy, ineffective management
- Not enough capital to grow the business
- Not enough expertise to enter new markets or expand product sales globally
- Lack of optimal capital structure – Capital structure refers to the mix of debt and equity that funds a business. In the past, a common private equity tactic was what is called a leveraged-buyout (LBO), which essentially means buying a business and funding the acquisition with a bunch of debt. When the company makes a lot of profit and interest rates are low, this works.
How can I get a job in private equity?
It’s possible – but rare – to enter private equity with just an undergraduate degree. The three most common paths are:
- with an MBA from an elite school (e.g., Harvard, Wharton, Yale)
- with experience gained at an investment bank (e.g., Goldman Sachs, Morgan Stanley)
- with experience gained at a management consultancy (e.g., McKinsey)
Examples of private equity firms are KKR, Apollo, Bain Capital, and Blackstone.
What's the pay of a private equity firm employee like?
Private equity is among the highest paying professions in finance. It's not uncommon for analysts to get paid $200,000 to $500,000 while partners at private-equity firms can make in the millions depending on firm performance. Top tier firms like Bain Capital and KKR will pay substantially more than middle Market private equity firms.
How do hedge funds make money?
Hedge funds invest other people’s money. They invest in public debt and equity markets; in other words, in stocks, bonds, commodities, and currencies. Usually, but not always, a hedge fund will focus on just one of these investment classes. Of particular note is that they are only allowed up to 99 investors. For this reason, hedge fund clientele are usually high net worth individuals or are other funds like pension funds.
How are hedge funds different from mutual funds?
Mutual funds are regulated. Hedge funds are uniquely unregulated. The laws that regulate investment funds only apply when the fund has 100 investors or more. Hedge funds get around this by having a maximum of 99 investors; so, essentially, the managers of these funds can do whatever they want without much government oversight. Obviously they can't do things like insider trading.
Hedge funds can invest in derivatives like options, futures, or swaps. Mutual funds cannot. Hedge funds can ‘go short,’ meaning that they can sell stock on behalf of someone else and buy it later. Mutual funds can only ‘go long,’ also known as ‘buy stocks.’
Hedge funds tend to be specialized. Sometimes they just invest in stocks. Other times they invest in debt/bonds. And sometimes, they invest in currencies of countries and make macroeconomic bets on the direction of a country's economy. An example of this type of fund is Bridgewater, which is one of the largest and most successful hedge funds in the world.
What's the pay of a hedge fund employee like?
Most hedge funds are small, many with fewer than 10 employees, each making upwards of a million dollars. It is not uncommon for partners to make in the tens of millions of dollars.
On average, employees in this sector work between 50 and 70 hours per week. While high, this figure is not as high as in investment banking, perhaps because hedge funds are on the buy side of the financial profession, which allows employees greater flexibility in dictating their pace of work.
How can I get a job with a hedge fund?
Most hedge fund employees enter the field with experience from another finance sector, such as investment banking. Finance graduates from top schools like Harvard or Wharton may sometimes be exceptions to this rule.
Quant funds are simply a type of hedge fund that effectively writes sophisticated programs to make investment decisions. The rationale goes something like this: there is a predictable pattern or cause-effect behind the movement of publicly traded assets (like stocks, bonds, commodities, and currencies) and these relationships are too complex for humans to understand, so instead of relying on individuals to make investment decisions, a few geniuses are hired to write algorithms that can detect these patterns and make investment decisions that are far too sophisticated for a human. It's kind of like Terminator, except instead of the machines trying to take over humankind through a violent uprising, they are simply taking the jobs of some finance grads.
Quant funds are often subsidiaries of larger funds or banks (e.g., Goldman Sachs) and sometimes standalone funds. They are a specialized type of hedge fund, which relies on using advanced statistics and data science to invest in stocks, currencies, debt, and derivatives. In some ways, quant funds help to make the market more efficient by identifying and making money through arbitrage opportunities.
How can I get a job with a quant fund?
Typically, quant funds hire people who possess advanced math, statistics, data science, or physics degrees. Recently, the sector has seen a surge in the use and advancement of artificial intelligence.
Sales and Trading
Sales and trading make up one of the primary functions of an investment bank, aside from investment banking itself. In simple terms, sales people pitch investment ideas to clients – high net worth individuals, companies, funds – and traders execute the deal. This twofold process is known as ‘market making.’
How does sales and trading work in the finance industry?
Here’s an example:
American Airlines wants to hedge against the price of jet fuel for the next five years. The company decides to buy jet fuel futures to hedge against the price of jet fuel going up. In this scenario, the airline would work with a sales person at an investment bank to make the trade.
Why are finance industry sales people and traders needed in this era of online trading?
While it’s easy to buy 100 shares of Google through an online brokerage firm or a face-to-face discount broker, buying a million shares of a company or assets like complex derivatives or swaps usually requires the help of a professional sales person.
What's the pay of a hedge fund employee like?
Sales and trading has a lower base pay than investment banking. However, because it is performance based, competent traders with a large book can make millions.
Because every business needs finance experts, the bulk of finance positions are with corporations. This means that opportunities exist in virtually all industries.
What’s the difference between corporate accounting and corporate finance jobs?
The accounting department has some key responsibilities, including accounts receivable, accounts payable, payroll, financial reporting, and maintaining financial controls. Corporate finance is the division of a company that deals with financial and investment decisions. This department is primarily concerned with maximizing shareholder value through both long-term and short-term financial planning, decision making, and the implementation of various strategies. Corporate finance associates work closely with accounting associates, who prepare financial statements and budgets. They spend much of their time working with spreadsheets to develop financial models and prepare projections.
How, specifically, does the corporate finance department help management make decisions?
The corporate finance division of a business is primarily interested in:
- helping make capital investment decisions
- deciding how to finance the business
- ensuring sufficient liquidity (cash on hand) is available to fund business operations
These three objectives define virtually every business. In other words, every business is in a way a finance business because every business must manage equity and debt. Equity is simply money financed by shareholders through the issuance of stock in exchange for cash. Debt is a loan that banks or private investors provide to finance the business. Debt carries with it maturity terms and interest payments, much like a mortgage. The corporate finance team determines the optimal mix of debt and equity to finance the business.
Consider this example:
A company wants to buy another asset, such as an expensive piece of equipment or a mine. The objective of the corporate finance department is to figure out if the potential purchase is a sound business decision. The department examines the risk/reward/trade-off of investments and calculates the cost of capital and ROI (return on investment), ultimately helping senior management decide how to allocate capital in the business.
Clearly, this process involves more than just looking at the assets on the company balance sheet. In fact, the goal is not to always have a lot of cash on hand, because cash is not productive. Instead, the intelligent approach is to ensure that there is enough cash and short term assets available to fund business operations, that there is access to short term debt instruments like a corporate line of credit during times of drought, and that management is consistently aware of the financial health of the business.
Behind a lot of the decisions that are made on both the buy side and the sell side is the work of the research department, and research analysts within it.
Research analysts typically "cover" a suite of companies within an industry (such as media and telecom) and maintain financial models and a suite of knowledge which they share with investment professionals. The job of a research analyst includes reading financial statements and press releases, developing financial models and industry reports, and being the primary steward of knowledge within a specific domain at a firm.
Research analysts usually work for large investment banks or asset managers and report up to the head of research. While most research analysts deal with public equity, there are other domain expertise areas as well including debt research, economic research, or commodities research.
Unlike investment banking, which includes a strong sales, pitching, and overall deal-making component, the job of a research analyst is far more "pure." Research analysis is therefore perhaps the most academic of finance careers, in that the primary motivation is the pursuit of truth and not a specific outcome. They are, for that reason, intentionally within an independent area of the organization.
Research analysts on the sell side vs. buy side
Research analysts can work on both the sell side and the buy side. On the sell side, they produce those reports that make "buy/hold/sell" recommendations. While those reports are used internally, they are also made publicly available and are in reality as much an exercise in branding for the bank as they are a support function for the sell side.
On the other hand, research analysts working on the buy side play more of a true support function for investment professionals, often doing the deep analysis required to make investment decisions in both public and private markets. These analysts are usually paid better than sell side analysts and their work is not made publicly available, since their recommendations are used to make proprietary decisions.
Becoming a research analyst
It's common to enter the research world straight out of college. Degrees in economics, business, accounting, finance, or math are the most common, but are not strictly necessary.
Unlike careers that are closer to the ultimate investment decision, the pay as a research analyst is lower than that of investment bankers or hedge fund analysts. However, more senior ranks in the research department (head of Latin American debt research, for instance) can bring in near-seven-figure incomes.
Venture capitalists invest in early-stage companies. They do not, however, invest much, if any, of their own money. Like other types of private investors, they raise outside money from limited partners (LPs) and invest on their behalf. These LPs are typically state pension funds, university endowments, private family businesses, or international sovereign wealth funds.
Venture capital funds range in size from less than $50 million (micro-stage funds) to $10 billion and more (mega venture funds). Softbank’s Vision Fund I is currently the largest venture fund in the world, with $98 billion of capital to invest in early-stage companies. As a point of comparison, the largest single private equity fund raised is approximately $20 billion.
What distinguishes venture capital funds from other kinds of funds?
Relative to hedge funds and private equity, venture capital (VC) funds are higher-risk, earlier-stage funds. As fledgling companies start up and grow, they pass through various stages of capital raising. At the earliest stages, they raise money from friends and family and angel investors (high net worth individuals who invest in private companies). At the latest stages, they receive minority or majority investments from private equity funds. The vast majority of funds raised between these stages (known as ‘Series’ A, B, C, etc.), are raised by venture capital firms.
How are venture capital firms structured?
The roles and responsibilities in a typical venture firm are typically organized as follows:
General Partner (GP)
This title is bestowed upon the individual or individuals tasked with (a) raising external money from outside investors and (b) deploying that money into private companies. GPs are usually responsible for corporate governance – which means that they typically take one or two seats on the boards of the companies in which they invest.
Limited Partner (LP)
An LP is an external investor who invests money in venture capital funds. Sometimes, a limited partner assumes an investment role or co-invests with the fund. Their money is typically locked up for seven to ten years, to allow the VC fund to realize full returns through company sales or public offerings.
Venture Partner (VP)
A venture partner is usually an industry expert – often a former entrepreneur – who participates in and contributes to funding pitches alongside GPs. In most cases, VPs assume a part-time role and do not have the fiduciary duties of a GP.
A partner with a venture capital firm is junior to a GP, is a full-time employee, and is normally industry focused. For example, some partners concentrate on investing in healthcare companies or high tech firms. While partners can sit on boards and earn ‘carry’ – profits distributed to the fund from investments – they generally are not involved in raising external capital from LPs.
Principals are junior investment decision makers. They sit in on investment pitches and help partners make decisions. Principals identified by their superiors as showing great promise, especially those on track for becoming a partner, sometimes sit on investment boards.
Similar to the analyst role in private equity or investment banking, a VC associate conducts research on markets, compiles reports on prospective deals for partners, and completes due diligence on potential investments. Most VC firms hire recent undergraduates to fill associate roles.
How can I become a venture capitalist?
There are multiple ways to become a venture capitalist. Associates and principals tend to join VC firms after earning a degree. Most aspiring associates major in business/finance, engineering (particularly electrical engineering), or computer science. Principals with VC firms are usually graduates of a top-tier MBA program and commonly set their sights on the more senior positions of partner, venture partner, or general partner.
Where are most venture capital jobs located?
The primary centers of venture capital activity are Silicon Valley/San Francisco, Boston, New York City, Tel Aviv, London, and Shanghai. The USA and China are the two largest markets, making up 90% of total venture capital investments of approximately $100 billion.
What’s the pay of a venture capitalist like?
Before specifically addressing salaries in this financial sector, it is worth noting that venture capitalists make their real money when they are able to deliver outsized returns to the LPs. The vast majority of VC funds do not outperform the S&P 500 benchmark, but those that do capitalize on the ‘2 & 20’ model, similar to how hedge funds and private equity funds work. The ‘2’ represents the 2% annual management fee on capital deployed that is used to pay salaries, cover overheads, and generally run the firm. The ‘20’ represents the 20% of any profits generated, usually over a certain return threshold, that are distributed to those within the firm that have ‘carry.’
Annual pay rates for an associate at a top-tier VC fund start at between $100,000 and $150,000 and scales up from there. Once an employee is in a position to earn ‘carry’ (a share of the profits), usually when they become a partner, their compensation becomes less salary-based and is determined much more by performance and results. For example, Benchmark Capital – one of the most successful VC funds – limits the number of GPs to a maximum of six. Benchmark has a maximum ‘fund size’ (monies raised from external investors for one set of investments) of around $550 million, which is small relative to its success. The firm’s last fund returned that $550 million nearly 25 times over, and the six partners split a large part of the 20% they earned in profits. As this example shows, extremely successful venture capitalists can earn billions of dollars over their lifetime.
What is commercial banking?
Commercial banking is the banking sector that most people are familiar with. A commercial bank accepts deposits, offers checking/savings accounts, and makes personal, business, and mortgage loans.
How do commercial banks make money?
Commercial banks make money by providing services that ‘enable banking’ for individual customers. These services include holding your money in accounts, providing loans, facilitating money transfers, and offering ATM services.
While these functions are simple and straightforward, commercial banking becomes complicated when it starts to merge its services with that of investment banking. Some banks have recently run into trouble by doing just that. The reason is that commercial banks have a reverse incentive to hold customers’ money without investing it, since their asset reserves grow very quickly. Multiple pieces of legislation, most notably Glass-Steagall have attempted to keep commercial banking separate from investment banking.
What kinds of jobs are available in commercial banking?
There are several different roles within the commercial banking sector. The two primary finance-focused ones are credit analyst and account manager.
Credit analysts are tasked with analyzing clients’ (individual or corporate) financial statements, competitive position, industry, and management team. They prepare the ‘application for credit’ that will determine the terms under which the loan applicant will receive money. The three major levers that credit analysts are able to pull are (1) the amount of capital, (2) the interest rate, and (3) the period of payback (length of the loan). Most credit analysts bring a finance related Bachelor’s Degree to the job and earn a starting salary of between $50,000 and $80,000. Pay levels are lower than in other financial sectors, like private equity, venture capital, or hedge funds, because the work is less high-stakes and easier to enter.
Account managers have a more client facing role. Their focus is on business development, on finding new clients for the bank and maintaining relationships with existing ones. They work closely with colleagues on the credit side to deliver results to their customers. Typically, account managers enter the profession with an MBA. Salaries are generally in the range of $60,000 to $100,000 or more. There is often a performance-based bonus plan connected to client success and client value for the bank.
What is financial planning?
Financial planning is the business of helping individuals and corporations meet their financial goals. The first step in this process is a comprehensive evaluation of an investor’s current and future financial state based on known variables. With this information, a financial planner can set up a client-customized plan. There are many large financial planning companies, like Edward Jones, that employ thousands of financial planners and leverage internal resources to better serve their clients.
Private Wealth Management (PWM) is a sub-component of financial planning that serves individuals, as opposed to corporations or funds. More commonly, however, ‘private wealth management’ refers to a separate branch of financial planning that serves high net worth (HNW) individuals with specific advisors dedicated to serving that exclusive clientele.