Based on the work performed by the banks, the financial industry is bifurcated into two major segments i.e. investment bank and commercial bank. Commercial banks is set up for the purpose of concluding commercial transactions, such as legally take deposits and lend money to the customers like individuals and corporates.
On the other hand, investment banks are established to offer services to investors. The operations of investment banks is different, and acts as an intermediary between buyers and sellers of stock and bond, that help clients in raising capital.
While a investment bank earns underwriting commission, commercial bank earn interest on loans provided to the customers. There exists a thin line of difference between the investment bank and commercial bank, which is presented in this article in detail.
Content: Investment Bank Vs Commercial Bank
- Comparison Chart
- Definition
- Key Differences
- Conclusion
Comparison Chart
| Basis for Comparison | Investment Bank | Commercial Bank |
|---|
| Meaning | Investment bank refers to a financial institution, that offers services like underwriting of securities, brokerage services and so on. | Commercial bank is a bank that provides services like accepting deposits, lending money, payment on standing order and many more. |
| Offers | Customer specific service | Standardized service |
| Associated with | Performance of financial market. | Nation's economic growth and demand for credit |
| Customer base | Few hundreds only | Millions |
| Banker to | Individuals, government and corporations. | All citizens |
| Income | Fees, commissions or profit on trading activities. | Fees and interest income |
Definition of Investment Bank
The term investment bank is used to define a financial institution that performs intricate financial transactions. These banks link the big corporations with the investors. The banks serve its customers in a number of ways like assisting government and corporations in issuing securities, helping the investors in buying stocks, bonds, etc. providing advisory services and so on.
The banks generate its income by charging fees for its advisory services. Further, the bank’s trading business is subject to profit or loss. These banks play a crucial role in aiding companies or government to take well-planned decisions and raise funds easily. The services provided by an investment bank are given as under:
- Underwriting of Securities
- Raising of capital
- Asset management
- Wealth management
- Advisory services
- Merger and Acquisitions
- Assisting companies in making an Initial Public Offer (IPO)
Definition of Commercial Bank
The term commercial bank refers to an establishment which is engaged in providing banking and financial services to the public as a whole. In earlier times, there was no such institution where people can deposit their money safely or take loans. So they used to go to money sharks to borrow funds, and they deposit their money in the post offices. Later on, banks are being developed that works as a banker to all the citizens of the country.
Commercial banks are owned publicly or privately or by the combination of the two. The banks help in the mobilizations of savings across theeconomy. It is governed by the Banking Regulation Act of India, 1949.
The banks accept deposits from the citizens of the country at a nominal interest rate and use that money in extending credit to other customers (borrowers), charging a higher rate of interest from them. In this way, commercial banks make its income from the left over amount of interest. Inaddition to this, one of the major sources of bank’s income is the fees charged by them for offering various services to the public. The diverse range ofservices provided by the commercial banks are:
- 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
Key Differences Between Investment Bank and Commercial Bank
The basic difference between investment bank and commercial bank are indicated below:
- A financial intermediary set up to provide investment and advisory services to the companies is known as an investment bank. Commercial Bank is abank established to provide banking services to the general public.
- Investment bank offers customer specific service whereas commercial bank offers standardized services.
- The customer base of a commercial bank is comparatively higher than an investment bank.
- The investment bank is related to the performance of the stock market while economic growth and the credit demand affect the rate of interest charged by the commercial bank.
- The investment bank is a banker to the individual, government, corporations, etc. On the other hand, commercial bank is a banker to all the citizens of thecountry.
- The investment bank generates its income from fees and commission. Unlike Commercial Bank, which generates income from interest and fees.
Conclusion
The primary difference between these two financial intermediaries is the audience they cater to as well as their area of business. While commercial banks serveall the citizens of the country and its main business is to accept deposits and grant loans. Investment banks deal in securities and so its primary activityis to trade in financial assets and provide advisory services.
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FAQs
Key Takeaways
What are the key differences between investment banks and commercial banks? ›
Commercial banks provide services for small businesses and consumers and offer services for everyday banking needs; investment banks provide financial services for institutional investors and larger enterprises.
What are the key differences between investment banks and commercial banks quizlet? ›
What are the key differences between investment banks and commercial banks? Investment banking involves, among other activities, underwriting new security issues and providing advice on mergers and acquisitions, whereas commercial banking primarily involves taking deposits and making loans.
How to differentiate between investment banking and merchant banking? ›
Both merchant banks and investment banks provide financial services to individuals and companies, but their primary functions differ. Merchant banks typically focus on providing advice and financing for mergers and acquisitions, while investment banks focus on underwriting and issuing securities.
What is the difference between investment corporate and commercial banking? ›
These services include checking and savings accounts, loans, mortgages, and credit cards. In summary, Corporate banking is for large organizations, Investment banking is for raising money through stocks and bonds, and commercial banking is for individuals and small businesses.
What is the main difference between commercial bank and other bank? ›
The key difference between retail and commercial banking is who the products are designed for. While retail banks service individuals, communities, small businesses, and families, commercial banks focus on larger companies, government entities, and institutions.
Why are commercial banks and investment banks separate? ›
The separation of investment and retail banking aims to protect the "utility" aspects of day-to-day banking from being endangered by losses sustained by higher-risk investment activities ("casino banking").
What makes investment banking different? ›
Investment banking is a type of banking involving organizing large financial transactions such as mergers or initial public offering (IPO) underwriting. Wholesale banking includes banking services such as currency conversion and large trade transactions between investment banks and other large institutions.
What is the biggest difference between commercial and central banks? ›
The central bank and Commercial bank are the important financial institutions of a country. The central bank is an institution that is responsible for the monetary policies of the country while the commercial bank provides banking and other financial services to the general public.
What is one difference between commercial banks and finance companies? ›
Finance companies make a profit by borrowing money at a rate lower than the rate at which they lend. This is similar to a commercial bank, with the primary difference being the source of funds, principally deposits for a bank and money and capital market borrowing for a finance company.
Investment managers perform financial analysis, portfolio allocation between bonds and stocks, equity research, and issue buy and sell recommendations. Investment bankers help with corporate finance needs, such as raising funds or capital.
What is different between commercial bank and merchants bank? ›
Commercial banks serve both businesses and individuals, while merchant banks work only with businesses. And rather than lending money to companies like a commercial bank, merchant banks instead often invest in the companies for a share of the ownership.
What is the difference between investment banking and finance? ›
Corporate finance and investment banking are very different in terms of their aims and purpose. Investment banking helps businesses raise capital in a variety of ways, such as mergers and acquisitions, as well as selling securities, while corporate finance helps organizations acquire funding and manage their assets.
What is the difference between commercial bank and investment bank? ›
The difference between commercial banking vs. investment banking is that investment banks typically raise money by selling securities (like stocks and bonds). On the other hand, commercial banks use consumer deposits to fund loans and mortgages, and the interest on those loans becomes profit for the bank.
How do investment banks differ from commercial banks Quizlet? ›
What are the key differences between investment banks and commercial banks? Investment banking involves, among other activities, underwriting new security issues and providing advice on mergers and acquisitions, whereas commercial banking primarily involves taking deposits and making loans.
What is the difference between commercial and business banking? ›
'Business' banking generally refers to the services used by smaller companies, including sole traders. 'Commercial' or 'corporate' banking generally refers to the services used by larger enterprises with a high turnover.
What are the primary differences between commercial banks and savings banks? ›
Commercial banks are classified as: retail banks and wholesale banks. Commercial banks are intermediaries between the central bank (FED) and the ultimate money borrowers. However, savings banks are financial institution whose primary purpose consists of accepting savings deposits and paying interest on those deposits.
What are the key differences between commercial banks and non bank financial intermediaries? ›
Difference between Banking Intermediaries and Non-Banking Financial Intermediaries. Banking intermediaries are like banks that keep your money safe and give out loans, following strict rules. Non-banking financial intermediaries, like investment funds or insurance companies, help in compounding and protect money.
