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Difference Between Commercial Bank and Investment Bank

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The main difference between a commercial bank and an investment bank is their target audience and the business they do. Commercial banks are open to all citizens. Their main business is to take deposits and give loans. Investment banks trade in securities. Their primary function is to provide advisory services and trade financial assets.

What is Commercial Bank?

Wells Fargo is a Commercial Bank

A commercial bank is a financial institution that accepts deposits and offers to check account services. It also offers basic financial products such as certificates of deposit, savings accounts, and other financial products to individuals and small businesses—most people bank at a commercial bank.

Commercial banks earn interest on loans like mortgages, auto, and business loans. Banks can make these loans with customer deposits. The general public can access basic banking products and services through commercial banks. These services include checking, savings, mortgages, loans, basic investment services like CDs, and other services such as safe deposit boxes.

Banks make money by charging service fees and charges. The fees charged vary depending on the product. They include account fees, safe deposit box fees, late fees, and overdraft fees. Many loan products have fees in addition to interest.

What is Investment Bank?

Goldman Sachs, one of the largest Investment Bank

An investment bank is a financial services corporation that functions as a go-between for high-stakes, intricate business deals. When a young firm is preparing for an initial public offering or when a corporation is merging with another company, an investment bank is often of assistance. It can also serve as a broker and financial adviser for big institutional customers, such as pension funds and other organizations.

An investment bank's advisory division is paid a fee. Based on the performance of its markets, the trading division earns commissions. Many banks also have retail banking departments that loan money to businesses and consumers. Investment bank professionals can be traders, financial advisors, or salespeople. Investment banking is a lucrative career, but it can also be stressful.

Investment banks' role as intermediaries between companies and financial markets is perhaps the most well-known aspect of their operations. In other words, they assist companies in issuing stock shares in either an initial public offering or an extra stock offering.

They also identify large-scale investors for firms' bonds to facilitate the arrangement of debt financing for the companies. The pre-underwriting counseling is the first step in the investment bank's advising duty and will continue even after the securities have been distributed.

Before the securities are made available for purchase, the investment bank must verify the correctness of a company's financial statements and provide potential investors with a prospectus that provides a comprehensive explanation of the offering in question. Clients of investment banks may range from businesses to pension funds to other financial organizations to governments to hedge funds.

Differences between Commercial Bank and Investment Bank

Although investment and commercial banking are in the same industry, they have different operations and services. Investment and commercial banks serve clients in the finance industry, from the clients they work for to the quality of their services.

Customer Profiles

Their clientele is one of the biggest differences between investment and commercial banking. Large corporations and investors are often partnered with investment bankers. They help businesses make large-scale investments and get funding.

Commercial banking is a service that works with small businesses and individuals to help them make financial decisions and provide advice. These customers have a lower level of knowledge about finance, so the work is simpler.

Approaches to Capital

A commercial bank can offer customers loans if funds are in reserve. A commercial bank can offer loans to customers for any purpose. On the other hand, an investment bank needs capital to support its clients. A customer may ask an investment bank to pay off any outstanding debts in return for capital. The bank must find qualified investors to purchase the stocks and provide capital to their clients.

Levels of Risk

In terms of risk, investment banking is more volatile than commercial banking and presents a higher level of risk. Other factors, such as regulation by the government, ensure that commercial banking is safe and low-risk for investors and customers. Due to the nature and complexity of its clients, investment banking is, however, a more risky model. Investment banks only make profits when their clients do. This means that if a deal goes wrong, the bank also loses.

Purpose

The main function of a commercial bank is to lend money, deposit money, and conduct all commercial transactions for all individuals and corporations. The public is the best way to satisfy the credit demand. The economy's growth is directly linked to the interest rate charged by commercial banks. Commercial banks are directly linked to the mobilization of money in the economy. The performance of stocks is closely related to investment banks. Investment banks are primarily involved in the testing of bonds or equities.

Comparison Chart: Investment Bank Vs Commercial Bank

BasisInvestment BankCommercial Bank
MeaningAn investment bank is a financial institution that provides brokerage services, underwriting securities, etc.A commercial bank is a bank that offers services such as accepting deposits, loan money, payment on standing orders, and other banking services.
Special OffersService-specific to the customerStandardized service
Customer BaseOnly a few hundredMillions
IncomeTrading activities are subject to fees, commissions, and profitFees and interest income
Risk InvolvedHigh riskLow risk

FAQ

What Role Does Commercial Bank Play In The Economy?

The fractional reserve banking system is a crucial part of the modern financial system. This allows banks to lend up to 90% of their deposits, theoretically increasing the economy's potential for lending.

Is My Money Safe at a Commercial Bank?

Yes, for the most part. FDIC insurance covers most deposit accounts up to $250,000, and commercial banks are tightly regulated. Law prohibits the mixing of investment banking and commercial banking funds.

What Is The Criticism Of An Investment Bank?

Investment banks can advise clients outside one division but trade their accounts within another. This is a possible conflict of interest. Investment banks need to maintain a Chinese wall separating divisions to prevent this. This figurative barrier prevents the information from being shared between divisions. It also serves to stop one side or another from making unfair profits at the expense of its clients.

Conclusion

Although the services are very different, the distinction between commercial and investment banks is often blurred. Retail and commercial banking services have become a part of investment banks, and other traditional commercial banks provide investment banking services. Graduates interested in banking jobs must understand the differences and explain why they would like to work in a particular company or division.

References

Feel free to comment and discuss about the article in the comment space below if you have any information or remarks to add. If you think we made a mistake, you can also report it there.

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About the Author: Nicolas Seignette

Nicolas Seignette, who holds a scientific baccalaureate, began his studies in mathematics and computer science applied to human and social sciences (MIASHS). He then continued his university studies with a DEUST WMI (Webmaster and Internet professions) at the University of Limoges before finishing his course with a professional license specialized in the IT professions. On 10Differences, he is in charge of the research and the writing of the articles concerning technology, sciences and mathematics.
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