How Do Investment Banks Differ From Commercial Banks?

Have you ever thought about how little you actually learned in high school? For example, we learn a lot about chemistry, ancient history and calculus — which at the time sounded okay. But now that you’re an adult, wouldn’t it have made more sense to learn about things that adults need to know? Like what a mortgage is, or how taxes work, or when you should start saving money?

Even more, what about banks? We know we’ve just asked a lot of hypothetical questions, but how much do you really know and understand about banks? Most people know that banks are where money is stored, where you can get loans and where you can get credit cards, but that’s often where the knowledge ends.

If you really think about it, we should all be required to know more about these institutions. After all, this is where your money is stored! Your livelihood is directly tied to your bank, and knowing more about it could be pretty helpful. Today, we’ll answer your questions like what are banks? And how do investment banks differ from commercial​ banks?

How Do Banks Work?

If all a bank did was store your money, they’d be out of business pretty much immediately. Because in the end, a bank is a business, even if we don’t think of them that way. They want to make money just like any business, especially because they are owned by shareholders who want to make tons of cash.

However, every bank is different, offering different pros and cons. For example, think of credit card commercials: every credit card essentially does the same thing, but they each have various rewards and perks.

In banking, there are two popular types of banks: investment and commercial. But before we tell you how do investment banks differ from commercial​ banks, let’s dive into each individually.

Investment Banks

An investment bank is, in a nutshell, real fancy. Their purpose is to help businesses, not individuals like you and me. Primarily, they aid companies in their efforts, including the purchase and sale of bonds, stocks and other investments.

Because they are more loosely regulated by the SEC, or Securities Exchange Commission, these banks operate in higher risk tolerances. They have a lot of freedom in their “strategic decision making,” a.k.a. what everyone is doing in all those business movies like “The Wolf of Wall Street.”

All right, so it’s less ridiculous than that, but investment banks do have the power to make investing decisions with the money entrusted to them.

Next up, commercial banks. They’re way better. (Okay, they’re not, but they are different.)

Commercial Banks

You’re probably already familiar with commercial banks because you’re still using the same commercial bank your parents were when they set up your first checking account for you around age 16. These are the banks that service individual customers in the form of checking and savings accounts, personal loans, mortgages and more.

Commercial banks, like investment banks, are owned by shareholders. But at commercial banks, their goal is to make money off their individual customers.
You’re probably pretty familiar with the ways they do this:

• Interest on loans
• Yearly fees
• ATM fees
• Management fees
• Late fees
• Overdraft … okay, you get the picture.

Do they cut their own salaries to better help their customers? Prioritize people over profit?

Nah. They just create fees. And being a customer at a commercial bank sometimes feels like you’re drowning in those fees.

How Do Investment Banks Differ From Commercial​ Banks?

Investment banks and commercial banks split up their services in 1933, but those regulations were repealed then in 1999. Since then, there are more hybrid institutions. If you’re interested in a bank that’s more risky but could also end up getting you more money in an investment account, a hybrid that specializes in investments could be good. If you’re wanting to play it safe, a commercial bank is probably best.

So, which one of these is the best choice for you? Well, are you an extremely rich man trying to increase your wealth without doing anything? If so, investment banks are probably the best option for you.

If you’re like the rest of us, well, the only other option is commercial. Or is it?

Enter: Credit Unions

There is a secret third option which we purposefully saved for the end (our version of pulling a rabbit out of a hat), which is a credit union. Credit unions are member-owned financial institutions, founded decades ago for the sole purpose of providing some relief from big banks and their ocean of fees to regular, everyday people.

Because they are member-owned, profits from credit unions go straight back into the members (including you) in the form of lower interest rates on loans, higher interest rates on your savings accounts and…

fewer fees!

To this day, credit unions aim to provide services to their customers that help them level the playing field when it comes to their wealth, redistributing it among the people instead of contributing to the ever-growing wealth gap.

This is not the goal of an investment bank or a commercial bank. If your aim is to make a lot of money through investments, a credit union might not be for you (though many do have investment accounts and services!)

If you’re starting out on your financial journey for the first time, maybe you shouldn’t be asking, “how do investment banks differ from commercial​ banks?” Instead, you might want to ask “how do credit unions differ from banks?”

While credit unions may not seem as fancy as investment or commercial banks, they are on the side of the individual rather than a bunch of faceless corporate employees who make millions of dollars. This means they cater to you first and foremost.