Commercial vs. Investment banking

Don’t mix investment banks with commercial banks. You cannot go into an investment bank and deposit your money, get your ATM card, or ask for a student loan. This is what commercial banks do. Commercial banks make money by charging higher interest on loans than what they’re paying on people’s deposits. For example, if you go to the bank and deposit $100 for a year, you might get $103 back at the end of the year or a 3% return. Now, when you deposit your $100, the bank will take that money and lend it to Joe. However, the bank will tell Joe that at the end of the year, he needs to pay back $107, or a 7% interest. Therefore, at the end of the year, Joe comes back and pays $107 to the bank, and you come back asking for your $103. The difference of $4 stays with the bank. It’s pretty simple concept. Again, that is commercial banking, not investment banking.

Commercial banking illustration:

Investment banking provides service and financial advice to corporations. They help in M&A transactions, issuing securities, and provide any other advice to corporations related to their financing. They earn money through charging fees and commissions for their business. Investment banks usually split into bulge bracket (bigger banks), and middle market or boutique banks (smaller banks).