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Investment Banking vs. Commercial Banking: How to Choose

Over the years, there have been some rational debates about the importance of investment banking. The big question that is commonly asked is, “Is investment banking worth your time?” The answer depends on your financial situation. If you are considered wealthy amongst your community, then yes, it may be a fantastic option for you. However, if you fall in the lower middle class of society, then stick with commercial banking.

Although, if you own a large firm, then investment banking is a great asset to have on your side. All employers have a hard year occasionally, and that is what investment banking is for, to help firms make money. Depending on what type of investment banking, what you choose determines where your assistance comes in play. Whether that is property investment banking or equity banking, they all help you and your company in some way. Ask yourself, do you need investment banking for your company, or is your commercial bank doing just fine?

Investment Banking

Simply put, investment banking is an industry that involves many different types of clients to help them raise funds on the capital market. Don’t let this fool you. There are many essential aspects of this industry. Investment banking specializes in complex financial transactions by underwriting. Underwriting is a method used in investment banking by acting as the client’s agent when issuing contracts or security issues.

Investment banking deals solely with private sales formed under the table of the stock market. Stocks, bonds, and other investments can be chosen to be sold publicly or privately. Most stockbrokers deal with public trading and investments, while investment bankers specialize in private trading, buying, and selling of anything on the capital market.

Investments banks accelerate the purchases of bonds and other investments and help companies with making initial public offers when they publicize their shares. Investments bankers each specialize in a different form of investment banking.

Here are the different types of jobs investments bankers can have.

  • Mergers and Acquisitions
  • Underwriting
  • Private Equity
  • Venture Capital

As you can see, there are many different forms of investment banking. Having a system that is well organized helps keep each client’s affairs to ensure the best quality of service.

Commercial Banking

Commercial banks offer all the general public and companies service. No matter the size of your company or account, retail banking is for everyone; although, they act as a financial manager for checking, savings, and deposit accounts. Commercial banks can make public loans from the money it holds.

Commercial banks are based on your personal banking needs. Primarily, commercial banks service deposits and debit accounts and provide individual, mortgage, and business loans. Most people prefer retail banking because their money is secure up to $300,000 per customer and is overseen by the government. However, there has been speculations about how safe and secure your money is in a commercial bank after the stock market crash of 2008. Some individuals claim they lost money from their accounts and that the government is to blame. Nonetheless, these accusations are hard to pinpoint, considering most of us do not work in finance.

For large firms, commercial banking is not always their first option because the interest rate is very shallow. Commercial banks claim that the more you have in an account, the more you can make, but this, however, is not true. The quickest way to grow your money is to have a higher interest rate. That is why most large companies prefer investment banking.

Major Differences

You can already see that these two types of banking are quite different. Some even believe that these separate methods of banking should be handled under one roof. First, let’s see how different these methods are to confirm if they should operate in one building.

One significant difference between the two styles of banking is that they operate and provide different services. Commercial banks can be used by an average person, while the wealthier classes typically use investment banking. However, you do not need to be extremely wealthy to use investment banking, but you do need to have money to spare.

Government Regulations

A disadvantage of using commercial banking is the regulations set by the government. National organizations such as the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve control the commercial banking system. Commercial banks are insured by the federal government to ensure your money and theirs are safe and under control. These programs help the FBI gain access to persons of interest. Money laundering often takes place within the commercial banking system, and that is why federal organizations assist in the management of this industry.

When it comes to commercial banking, customers often have multiple accounts to split up their money. Customers try to trick the system, so if something ever happens, all their funds are secure and protected. As stated above, commercial banks only secure your money up to $300,000. For example, a customer may have four accounts with $200,000 in each, so the federal organizations cannot touch their money.

Investment banking is overseen by the Securities and Exchange Commissions (SEC). Some say that investment banking is run loosely due to the lack of federal regulations and structure. However, the SEC offers less protection and security when it comes to your money and investments. Although, you do have more freedom when it comes to how much buying, selling, and trading you do. Without having a significant amount of regulations, you can have as many accounts as you want, without having to split up your money. While this may make your financial advisors’ life more comfortable, it may be better to split up your stock between at least three accounts. Having separate accounts makes it easier to manage your shares.

Risk Factors

Even though government regulations seem like a disadvantage, they create a protective shield around your accounts. Commercial banks have lower risk factors because of the strict rules and regulations set by federal organizations. The structure the FDIC and Federal Reserves have placed within the system makes it challenging for any outside entities to create any sort of conflict for customers.  

On the other hand, investment banking has less structure and restrictions, which opens a window for risks to take place. Investment banking doesn’t offer the same amount of protection for its customers that commercial banking does. Likewise, it is always a good idea to do additional research about stocks, bonds, or other investments before buying or trading.

What is Right for You

It may seem impossible to choose what is right for you and your business, but there are always tools to help you decide. If you already have a financial advisor, consider forming a meeting with them to figure out the best route for your assets. Below are some factors to consider before making any rational decisions.

Budget

Every company should have a budget; if not, you might want to get on that. Have your financial advisors dig into your company’s history and previous financial records. Figure up an adjustment for your budget and focus on the goal for your profits. If you have been meeting your expectations, then just stick with commercial banking. However, if you are falling short of your desired profit amount, talk to a stockbroker about your options.

Risks

Another aspect to consider is how many risks are you willing to take to come out on top? For instance, if the stock market experienced a major crash again, are you okay with any problems that may arise? If the answer to that question is no, then there is a safer option that gives you the best of both worlds. However, this is not common, but it is doable. Some partners have a wavy financial history and acknowledge the idea of split banking systems. This means that they place half their money with investment banking and the other half in commercial banking.

The split method doesn’t always work, but if you play your cards right, it just might be what your business needs. However, it is still an excellent idea to explore both banking methods fully before deciding.

Combining Methods

Individuals who choose to operate with both functions tend to struggle during the first five years. Why do they struggle? First, some financial advisors are only familiar with one type of banking; therefore, they may have to learn a whole new system just to keep your affairs in order. A task that large can be challenging for one person, so another option would be to hire another financial advisor that is familiar with the other method.

The advantages that come with using both methods are that your money may grow at an exponential rate. Sharing investments on both ends of the spectrum can raise your interest rates and ensure some of your funds are secure.

A disadvantage of having both investment and commercial banking is the number of accounts you may acquire. Some stockbrokers prefer that customers have at least three considerations to keep their bonds and shares separated and to help you stay organized. Depending on how much you place in a commercial bank, you can determine the amount that the government protects. As you know, the government has set regulations to only protect an exact amount of funds in any commercial banking account.

Furthermore, each company has its own needs and budget requirements. No matter which way your advisor suggest you go, be sure to do an excessive amount of research. Dig into different banks and agencies and discover the various policies they offer. Keep in mind that not every commercial bank has the same interest rate, nor do they provide the same types of accounts. Just like people, every company and agency are different with their own set of rules. Even though investment banking is loosely managed, that doesn’t mean the owner of the company didn’t create some sort of structure.

Before making a decision, consider all aspects of your assets and assess your current situation. Create goals for your business and take each step necessary to make it happen.

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