What is Investment Banking vs Commercial Banking?
Investment banking vs commercial banking is a comparison of which markets and clientele each banking sector serves.
- Investment banking is designed to help large entities make sound investments, issue company stock, and assist with mergers and acquisitions.
- Commercial banking is designed to help individuals and small businesses with basic financial transactions.
- Investment banking and commercial banking are different – in a nutshell – because of scale. Investment banks typically deal with much larger transactions, while commercial banks handle the more basic ones.
What is Investment Banking?
Investment banking is devoted to assisting companies, institutions, and other large entities (such as governments) in the management of their money. It is designed to offer clientele a host of different options in order to help them succeed financially.
Investment banks assist their major clients by underwriting equity and debt securities, helping with the creation of capital and issuance of stocks. Investment banks are also typically always involved during mergers and acquisitions.
Investment banking is structured to help large entities. One of the most important functions investment banks perform is the issuing of stock for companies, namely a company’s initial public offer (IPO). When a company makes its stock available to the public for the first time, money flow can start to get confusing. Investment banks step in to help handle the matter.
Investment banks also act as advisors, helping companies and other organizations determine if trade with other companies is advisable. As advisors, investment banks also help their clients decide if merging with or acquiring a company is a wise move.
What is Commercial Banking?
Commercial banking is devoted to serving individuals and small businesses for their daily financial needs. They allow individuals to deposit and cash checks, withdraw cash, deposit money into a savings account, and apply for certain loans.
Commercial banks aren’t allowed to operate unless the federal government gives them a charter. In some cases, it’s not the federal government that issues the charter, but rather the state that the bank will operate in. Banks operating under a charter need to become members of the Federal Reserve System, which places more requirements on them. One of the most important requirements is the carrying of deposit insurance. It is a regulation that offers protection to consumers should the bank fail. The insurance covers deposits up to $250,000.
Commercial banks generate income from interest rates on loans, as well as from the service fees they charge.
Differences: Investment Banking vs Commercial Banking
Clearly, the primary difference between investment banking and commercial banking is the clientele. Investment banks serve large corporations, while commercial banks cater to the general public.
Also, there are major differences in services. Investment banks handle large amounts of money and advise their clients about sound investments. Commercial banks handle basic financial transactions, which typically amount to far lower dollar amounts.
3. Performance Measure
Another key difference is that investment banks and their performance are tied to the performance of the stock market. On the other hand, commercial banks are affected by credit demand and economic growth.
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