What is the difference between a bank and an investment company?
Key Takeaways
Firstly, we need to acknowledge the differences between a lender and an investor. A lender does exactly what the word says-they lend you money that you must pay back, usually with interest. An investor puts money into a business, projects, schemes, ideas and so on, with the expectation of having a stake in the profits.
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.
Key Takeaways
The critical difference between the two types of banks is who they provide services to. Commercial banks accept deposits, make loans, safeguard assets, and work with many small and medium-sized businesses and consumers. Investment banks provide services to large corporations and institutional investors.
The job of a bank is to assist the company in which it can help. Bank makes profits from the spread between the rate it receives and pays. On the other hand, a company operates to produce goods or services and ultimately sells these goods or services to another business, end customer, or Government.
Banks offer comprehensive financial services, including deposit-taking, lending, payment services, investment products, and more. In contrast, NBFCs primarily deal in lending and investment activities, offering services like loans, asset financing, and investment advisory.
In essence, investment banks are a bridge between large enterprises and the investor. Their primary roles are to advise businesses and governments on how to meet their financial challenges and to help them procure financing, whether it be from stock offerings, bond issues, or derivative products.
The business of both banks and institutional investors involves risk-taking. Institutional investors take mainly insurance risks, longevity risks and market risks, while banks predominantly take on credit, interest rate and liquidity risk.
In it's simplest form, private banking is meant to help wealthy individuals and large institutions preserve and grow their wealth/assets, while investment banking is about helping large companies buy/sell companies or raise capital via equity or debt.
Investment bankers meet with clients, send emails, prepare offers, conduct financial projections, work on signing new clients to the company, providing initial public offerings (IPOs), and mergers and acquisitions. These are some of the tasks an investment banker must do on a daily or weekly basis.
What do investment companies do?
Investment companies can be privately or publicly owned, and they engage in the management, sale, and marketing of investment products to the public. Investment companies make profits by buying and selling shares, property, bonds, cash, other funds and other assets.
Definition: Investment banking is a special segment of banking operation that helps individuals or organisations raise capital and provide financial consultancy services to them. They act as intermediaries between security issuers and investors and help new firms to go public.
Investment banks don't take deposits. Instead, one of their main activities is raising money by selling 'securities' (such as shares or bonds) to investors, including high net-worth individuals and organisations such as pension funds.
Goldman Sachs & Co.
Goldman Sachs is widely known as the most prestigious investment bank on Wall Street. The bank's interns receive phenomenal training, hands-on experience, and the opportunity to rotate across many groups and desks.
Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.
Banks receive and process deposits and withdrawals. They safeguard your money for you. Banks also give out loans, but they are not the same as loan companies. Loan companies give out loans only (they do not safeguard your money) and will require you to make repayments for your loan.
A company's balance sheet typically includes assets such as inventory, property, plant, and equipment, and liabilities such as accounts payable and loans. In contrast, a bank's balance sheet typically includes assets such as loans and investments, and liabilities such as deposits and borrowing.
Bankers give them options on loans, which these large companies may not immediately need. Companies build strong banking relationships by working with their bank and familiarizing themselves with the various processes, while arming themselves with insurance should a financial crisis arise.
Banks are mainly focused on providing retail banking products and services, while non-banking financial institutions offer a wider range of products and services, including corporate banking, investment banking, and private banking.
The Bottom Line
Banks earn revenue primarily on the difference in the interest rates charged on loans or other forms of borrowing and the rates paid to depositors. Financial services primarily earn revenue through fees, commissions, and other methods.
What is the main difference between banking and non-banking financial companies?
The difference between a bank and NBFC is that a bank is a government-authorized entity that provides banking services to the people, whereas NBFC is a company providing banking services to the people without holding a bank license.
Banks are owned by investors who may or may not be depositors. Banks are owned and controlled by stockholders, whose number of votes depend upon number of shares owned. Customers don't have voting rights, cannot be elected to the board, and have no say in how their bank is operated.
The three main types of investment banks are boutiques, middle-markets, and bulge bracket banks. Boutique investment banks can be further divided into regional boutiques, which are smaller and regionally focused, and elite boutiques, which often handle large deals.
The purpose of Investment banks is to raise capital for their corporate clients. Capital can flow in the form of equity (that comes from investors) and debt. Emphasizing the first one, they are called investment banks.
Institutional investors make money by charging fees and commissions to their members or clients. For example, a hedge fund may charge a certain percentage of a client's investment gains or total assets. There may also be flat fees for holding an account or making trades or withdrawals.
