How Do You Differentiate Between Investment Banks And Merchant Banks?

Feb 12, 2024 By Triston Martin

However, the thin line that should ideally divide the tasks of these two organizations sometimes becomes muddled since the activities often overlap in the spheres of responsibility of the other. Both investment and merchant banks engage in operations related to trade financing, but investment banks also participate in international finance and underwriting activities.

Investment Banks

Investment banks are a kind of financial organization that acts as a go-between for various transactions. The activities they engage in often differ from one institution to the next. The majority of their services involve large-scale and difficult-to-understand financial dealings. Customers of investment banks are often governments and other financial institutions and institutional customers like hedge funds, pension funds, and major enterprises. This is because most investment banking customers no longer require trade financing or any of the associated credit products.

Investment banks generally are the ones who underwrite these securities and then sell them in massive blocks. Small boutique investment banking organizations may choose to specialize in a certain subset of the investment banking industry. In addition to this, they give research and financial advising to firms and facilitate mergers and acquisitions (M & M&A) of companies via the selling of shares.

Advising Services

The fact that investment banks also provide banking and advising services justifies the possibility of their charging fees. They may also be fund-based since they can generate money from their customers in interest and other leases. Barclays (BCS), UBS (UBS), and Credit Suisse are three of the most well-known and significant financial institutions in the world that operate as investment banks (CS). Many major financial institutions also maintain smaller retail and commercial branches, which are open to the general public. Merchant banks provide their services to enterprises that are too big for venture capital firms but are yet of a size that allows them to make an attractive public share offering on a major exchange. Investment banks, on the other hand, concentrate on larger businesses.

Merchant Banks

The actual list of services provided by merchant banks varies greatly from one institution to the next, just as it does with investment banks. It is interesting to note that the word merchant bank was the British designation for what is now known as investment banks. Because merchant banks do not interact with the general public, customers cannot make deposits or withdrawals at these institutions. Instead, they cater to people with a very high net worth (HNWIs) and international organizations.

Activities related to foreign finance and underwriting make up a significant portion of their principal responsibilities. Foreign direct investment in corporations, foreign direct investment in real estate, trade financing, and the facilitation of international transactions are some examples of these. However, this list is not exhaustive. Merchant banks may be engaged in providing letters of credit, moving cash worldwide, advising on trades and trading technologies, and so on. These banks generate revenue by collecting fees from the customers they serve by providing advisory services and other associated services.

Important Variations

There is a thin line that separates investment banks from commercial banks. There are several significant differences between the two, even though both are involved in the financial sector. Investment banks, as a rule, concentrate their efforts on initial public offerings (IPOs) and major public and private share offers. Variety of other highly differentiated corporate credit solutions to firms operating on a smaller scale.

Larger merchant banks typically engage in privately placing equity with other financial institutions to bridge the gap between venture capital and a public offering. As part of this process, larger merchant banks frequently acquire large portions of ownership in companies that, in their opinion, have strong balance sheets, solid fundamentals, and strong growth potential. Merchants are more likely to provide trade financing products to their customers, whereas investment banks are less likely to do so. This is because most investment banking customers no longer require trade financing or any of the associated credit products.

Taking Into Account Particulars

Investment banks primarily cater to big organizations such as major mutual fund houses. Still, investment banks can also provide consultancy services to private investors via their private wealth management and private client services departments. Buy, sell, and hold ratings on a variety of stock investments are often included in the supplied research. Merchant banks are financial institutions that provide various services to high-net-worth individuals and organizations, the majority of whom are involved in international trade.

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