Commercial Banking vs. Investment Banking: Key Differences

By Indeed Editorial Team

Published 26 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The finance industry includes various institutions and banking firms. Commercial and investment banks offer various services to their clients and job opportunities to their employees. If you're considering a career in banking, it's important to learn more about investment and commercial banking. In this article, we discuss the differences between investment and commercial banking to help you make an informed choice about your career path.

Commercial banking vs. investment banking: key differences

To determine the differences between commercial banking vs. investment banking, it's important to define each. Here are the definitions for these terms:

What is commercial banking?

Commercial banking is the part of banking that serves the general public, such as small or mid-sized companies or individual clients. Commercial banks are economic institutions that manage savings and checking accounts, offer financial products, accept deposits and make loans. They generate revenue through interest, service charges and fees. They also make a profit by lending to clients. You can find commercial banks in traditional buildings and access their services online.

Commercial banks fall into three main types. These include the following:

  • Private banks: These are banks whose major share capital lies with private businesses and individuals. As such, they're limited liability companies.

  • Public sector banks: These are banks nationalised by the region's government. The major stakeholder is the government and, in most cases, these banks operate under the central bank.

  • Foreign banks: These are banks with headquarters in a foreign country and set up branches in various parts of the world. A foreign bank plays a vital role in helping support the economic standing of the region, apart from serving the financial needs of its residents.

Related: Explore Back Office Work in Banks and Its Importance

What is investment banking?

Investment banking is a specific area of banking dedicated to raising capital for businesses. Investment banks help institutional investors and large corporations handle the financial aspects of large projects. Their activities may include advising in stock placement, raising capital for companies and facilitating mergers and acquisitions.

There are two primary facets of investment banks. One side sells portfolio products and trades securities. Trading securities may also involve underwriting. When an investment bank underwrites securities, such as for an initial public offering (IPO), it conducts research to assess the risk level and the right price. Next, the bank buys the securities and sells them to raise capital. The other facet of investment banking provides investment advice to clients. Investment banks generate revenue through the following services:

  • completing proprietary trading

  • offering asset management, trading, underwriting and research to clients

  • selling advising services on mergers and acquisitions

  • matching stock sellers with buyers

Related: Careers in Finance (With Types, Requirements and Job Roles)

Types of investment banks

Within investment banking, there are three main types of institutions:

Boutique investment banks

Boutique investment firms focus on small deals, typically worth less than $100 million. They offer specialised services, such as restructuring or mergers and acquisitions. Some specialise in a particular sector like healthcare, energy or technology.

Elite boutique investment banks are an exception to this definition. While they specialise in a few operations like other boutique banks, they handle large deals above $1 billion. They often reach elite status after managing larger deals.

Bulge bracket investment banks

Bulge bracket refers to giant multinational investment banks that offer services to large corporations and governments. They often provide both advisory and financing banking services, in addition to sales, market making and research for a variety of financial products. The bulge bracket is often the book-running manager or the bank that controls the allocation of securities to investors. Bulge bracket investment banks often handle deals worth more than $1 billion.

Middle-market investment banks

A middle-market investment bank occupies the middle ground between the massive bulge bracket investment bank and the smaller boutique investment banking firm. Middle-market investment banks rarely operate internationally, though they have a wide geographic presence in Hong Kong. They get their name from the size of their deals. Middle-market investment banks often handle deals between $50 million and $500 million. They offer equity, debt and merger and acquisition advisory services.

Other differences between commercial banking and investment banking

Here are other differences to consider when contemplating a career in either commercial or investment banking:

Risk

Investment banking often presents a higher risk than commercial banking. Commercial banks present a very low risk, as the demand for their service is high. Moreover, because commercial banking is of public interest, the government offers some regulation, which reduces the risk tolerance of commercial banking. Risk tolerance is the level to which investors accept losing money in their investments.

Investment banking presents a high risk because it involves corporations, investors and equity and bonds handling. Their profit depends on the investors' profit, which also makes it riskier. The government intervenes less in investment banks than in commercial banks, which results in a higher risk tolerance level.

Capital

Companies can ask commercial banks for a loan when they need capital. Commercial banks already have the funds from their depositors to lend it. Conversely, companies can ask investment banks to sell their equity or debt to obtain capital. Investment banks find investors who are ready to buy stocks or bonds from their clients to earn capital.

Related: The 6 Main Finance Manager Functions (Plus Skills)

Work-life balance

Commercial bankers often have a better work-life balance than investment bankers. Their working hours are often the standard 40 hours per week, and they have more flexibility to take time off. Conversely, investment bankers sometimes work between 65 and 75 hours a week, and some banks require their personnel to work during the weekend. Also, many investment banking professionals are required to be available by phone or email at all times to address client concerns and timely opportunities.

Related: How to Become an Investment Banker

Salary

On average, wages are higher in the investment banking sector than in commercial banking. The average base salary of investment bankers salary is $618,240 per year. A more specialised role, like investment banking analyst, may earn more per year. The average base salary for an entry-level position in the commercial banking sector, like a teller, is $193,572 per year. The average base salary for a commercial banker is $424,530 per year.

Positions

Commercial banks offer the following positions:

  • Technical programmer: When you're a technical programmer, you develop computer applications for the bank's employees and customers.

  • Loan officer: Loan officers analyse the clients' financial situation to decide which loan is suitable for them and determine eligibility.

  • Teller: As a teller, you perform account transactions like cashing checks, receiving loan payments or recording deposits for the bank's customers.

  • Trust officer: In a trust officer position, you focus on trust services, taxes, estate planning and investment.

  • Branch manager: When you work as a branch manager, you supervise employees, maintain business relationships and manage the bank's activities.

In investment banking, you can work at different levels according to your experience:

  • Managing director: This highly experienced position involves making strategic decisions and representing the firm in all internal and external proceedings.

  • Vice president: As a vice president, you're responsible for the management, development and education of the bank associates.

  • Associate: This role is an intermediary between junior and senior bankers, and they are also in contact with clients. They assist in the preparation of financial models and create marketing presentations.

  • Capital market analyst: These analysts study market trends to identify appropriate investments. They also assess and compile reports for the investors.

  • Consultant: A consultant provides advice to organisations to help them succeed financially. They may specialise in a particular sector.

  • Trading specialist: These experts coordinate financial and credit operations.

  • Analyst: An analyst's main duty is to analyse financial data like stock performance or market trends to make investment recommendations to associates. Other tasks include creating financial models, encoding data and creating pitch books.

Related: 12 Best-Paid Jobs in Finance (With Job Duties and Salaries)

Clientele

As an investment banker, you may interact with corporations, investors and government representatives to help them succeed financially. When you work in commercial banking, you help small to medium-sized businesses and individuals with daily banking transactions. You might encounter financially educated people, but there might be many clients from the general public who you may educate about financial products.

Salary figures reflect data listed on Indeed Salaries and on the quoted websites at time of writing. Salaries may vary depending on the hiring organisation and a candidate's experience, academic background and location.

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