Difference Between Investment Banks and Commercial Banks

 

In the world of finance, two types of banks play very different but equally important roles-investment banks and commercial banks. Both are part of the financial ecosystem yet they function differently.  Commercial  bank handles your savings account the another helps companies raise millions through the stock market. 

 Let’s explore the major differences between investment banks and commercial banks:

 

1. Core Function

 Investment Banks assist companies, governments, and institutions in raising capital through IPO, M&A, underwriting, and financial advisory services.

 Commercial Banks primarily serve individuals and businesses by accepting deposits, offering loans, and providing retail banking services.

 

2. Client Base

 Investment Banks work with large corporations, institutional investors, and high-net-worth clients.

 

Commercial Banks cater to the general public, SMEs, and retail clients.

 

3. Services Offered

 Investment Banks offer services like equity research, asset management, trading & brokerage, and risk management.

 Commercial Banks provide savings/current accounts, fixed deposits, personal/business loans, debit/credit cards, etc.

 

4. Risk Profile

 Investment Banking carries higher risk, as it deals with volatile markets, large deals, and capital markets.

 Commercial Banking has moderate to low risk, regulated by central banks, with stable income from interest and service charges.

 

5. Revenue Model

 Investment Banks earn from fees, commissions, underwriting spreads, and trading profits.

 Commercial Banks generate revenue through interest on loans, account fees, and transaction charges.

 

 6. Regulation

 Investment Banks are regulated by bodies like SEBI (in India) or SEC (in the US).

 Commercial Banks are regulated by central banks such as the Reserve Bank of India (RBI) or the Federal Reserve (US).

 

While both investment and commercial banks are crucial to the financial system, their roles are distinct. Investment banks focus on capital markets and high-level corporate finance, while commercial banks serve the day-to-day financial needs of individuals and businesses.

 Understanding the difference helps investors, students, and entrepreneurs make informed decisions when dealing with the financial world. Whether you're opening a savings account or planning an IPO, choosing the right type of bank is essential.