What is investment banking? Particularly, how is it distinguished from commercial banking?

Investment and commercial banking are two different financial systems in a nutshell. Read this blog if you have always been confused about which banking system applies where.

What is meant by investment banking?

Investment banking solely focuses on assisting companies, institutions, and other large entities, such as the government in the management of their revenue. It is structured to offer clientele a plethora of suitable options in order to help them attain financial success.

Investment banks assist their primary clients by underwriting equity and debt securities, thereby helping with the development of capital and issuance of stocks. This type of banking is typically involved at times of mergers and acquisitions.

Investment banking is structured to help large business entities, with the main purpose to execute important functions, like the issuing of stock for companies, including a company’s initial public offer (IPO).The investment banking system also steps in to help handle matters that come up when an organisation makes it’s stock available to the public for the first time, which gets confusing as the money flow starts.

Investment banks also play a crucial role as advisors, helping corporate and other organisations determine if trade with other potential companies is advisable. As advisors, investment banks also provide recommendations to help their clients decide if merging with or acquiring another entity is a wise move.

What is meant by commercial banking?

Commercial banking primarily focuses on serving individuals and small businesses for their regular financial needs. They make way for individuals to deposit and cash checks, deposit money into a savings account, withdraw cash, and apply for suitable loans.

Commercial banks are not allowed to operate unless the national government gives them a charter. In some instances, it is not the national government that issues the charter, but the state government that the bank will operate in. Commercial banks operating under a charter are required to become members of the national reserve system to execute deposit insurance.

Main differences between investment and commercial banking

  • Clients − the primary difference between investment banking and commercial banking is the niche of clientele. Investment banking system serves large corporations, while the commercial banking system caters to the general public.
  • Services − there are major differences in terms of services as well. Investment banking system handles large sums of money and advises its clients about sound investments, while the commercial banking system handles basic financial transactions, which typically amounts to a few dollar amounts.
  • Performance − another key difference is that investment banking system and their performance are tied to the fluctuations of the stock market. On the other hand, the commercial banking system is affected by credit demand and economic growth.

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