Commercial Bank Vs Investment Bank

Though both banks play a very important role in a modern economy, their functions are very different from each other. When we say a bank, most people think of it as a commercial bank which they accept deposits, loans, safeguard assets, and work with different types of clients.

However, Investment bank provides services to large corporations and investors which give financing for large scale business projects rather than individuals.

In terms of career, investment banks tend to be more competitive and more demanding from employees with much higher salaries.

  • Commercial Banking:  Here they provide different varieties of career choices as positions like tellers, sales associates, trust officers, loan officers, branch managers, and technical programmers. Instead of explaining the technical terms and numbers, we will just discuss briefly how they work and earn money. It is sometimes called retail banking or traditional banking because it was introduced earlier than investment banking. Here we have three major as buyer, seller and bank itself.

Considering the figure above, we have investor as the seller where it might be either individual or business. They deposit their money to the bank, in return, they gain interest depending on amount and time set. Bank uses this money to provide loan to buyers as people or business who need investment whether it is a home loan, car loan, or personal loan. However, the buyer has to give interest rates base on the amount they took a loan and for how long. That’s how traditional banking works on the basis of interest.

  • Investment Banking: This bank doesn’t keep any deposit with itself to pay interest nor does it guarantees the safekeeping of money of investors like a commercial bank. In fact, they act as a financial broker as the third party where it makes sure that both buyer and seller meet and come to an agreement about their business.

They work with large cooperation instead of individual and small business. Let’s say we have a buyer as company X which it wants to raise funds for their company. Now the company has two options as they can go to banks for a loan or sell equity dilution, which means that they will give their shares to certain investors who would be willing to do that via initial public offering (IPO). However, it’s very difficult because it involves legalities associated, process, and valuations. Here, where we use a financial broker who is very expert in their field. Buyer contact with a broker to do all these tasks and identify all available investors for the IPO. And if you ask how broker earn money, they earn through commission depending on the number of funds that raised for the company.

Summary: Commercial banking works with different kind of clients, deposition form investors and providing loan to clients where this process keeps going depending on the interest they earn. Whereas, investment baking works with large cooperation by finding a proper investor for the company (buyer) and gain commission from the company.