A bank is classified into two categories based on the type of work it does: commercial banks and investment banks. When most people hear the word bank, they immediately think of commercial banks. Commercial banks are used by the general public for everyday transactions such as lending and depositing money. For the general population, it entails depositing wages into accounts and withdrawing funds only when necessary. Investment banking is for people who want to make money. The term “investment banking” refers to the process of raising funds through investment banking. In this blog, we will discuss what is investment banking, what is commercial banking and the difference between the two.
What is Investment Banking?
Investment banking focuses on supporting businesses, organisations, and other major entities (such as governments) with their financial management. It is intended to provide clients with a variety of options in order to assist them in achieving financial success. Their services include:
- Underwriting of Securities
- Raising of capital
- Asset management
- Wealth management
- Advisory services
- Merger and Acquisitions
- Assisting companies in making an Initial Public Offer (IPO)
Investment banks serve its major clients by underwriting equity and debt instruments, assisting in capital formation, and issuing shares. During mergers and acquisitions, investment banks are frequently involved.
Investment banking is designed to assist huge corporations. Issuing stock for firms, often known as an initial public offering (IPO), is one of the most essential services that investment banks do. Money flow can become complex when a corporation makes its stock available to the public for the first time. Investment banks move in to assist with the situation.
What is Commercial Banking?
Commercial banking focuses on goods and services tailored to the needs of businesses, institutions, and, in some cases, governments. Commercial banks provide the wide range of services which include:
- Accepting deposits
- Advancing loans
- Overdraft and cash credit facility
- Payment on standing instructions
- Withdrawal of money on demand
- Collection of bills and promissory notes
- Trading in shares and debentures on behalf of customer
- Locker facility
- ATM Card, Debit Card, Credit Card Facility
- Mobile banking
- Internet banking
Many of the services offered by commercial banks, such as checking and savings accounts, are comparable to those offered by retail banks to individuals. Nevertheless, many of the products and services provided by commercial banks, on the other hand, are tailored to the financial needs of businesses and institutions.
The commercial banks are usually stock organisations, their objective is to create a profit for their stockholders. They usually do this through a process known as “financial intermediation,” in which savers who are willing to keep their money in the bank are paired with lenders who require loans.
Difference Between Investment Banking and Commercial Banking
The main differences between investment banking and commercial banking are listed below:
The major distinction between investment banking and commercial banking is, without a doubt, the clientele. Commercial banks provide services to the normal public while investment banks offer services to investors, corporations, and government.
Another key difference between investment banking and commercial banking is the services provided by them. Investment banking services usually include buying and selling of bonds, stocks while that of commercial banks include deposits, mortgage loans, and lending loans.
Another difference between investment banking and commercial banking lies in the performance measure. Commercial banking’s performance is connected with credit demand and economic growth, and that of investment banks depends upon the performance of the financial market.
The other major difference between investment banking and commercial banking is how they earn profit. The difference between lending and deposit rates is how commercial banks make money and while investment banks earn from the fees charged on different services.
Customer base is another difference between the two banks. Commercial banks have a very high number of customers while investment banks have less customers.
One of the differences between investment banking and commercial banking is the risk involved. In commercial banking, the risk involved is low and in investment banking the risk is high.
The fundamental distinction between these two banking systems is the type of clientele they serve as well as their industry. Commercial banks, on the other hand, serve all people of the country and their primary activity is to receive deposits and make loans. Investment banks are primarily involved in the trading of financial assets and the provision of consulting services.