Difference Between Investment Bank and Brokerage Firm

Edited by Diffzy | Updated on: September 19, 2022

       

Difference Between Investment Bank and Brokerage Firm Difference Between Investment Bank and Brokerage Firm

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Introduction

Regarding investment, many beginner investors want to hop directly in with both feet. However, only a small number of investors are successful in doing so. Investing in anything requires a certain amount of skill. Investors must understand that some investments may not be profitable and may even cause losses for them. It is important to study more about investing and exactly how everything works and to figure out individual investment goals.

Investment banks and brokerage firms are two types of financial institutions that provide services to investors who wish to invest in long-term financial growth and generate passive income. Many professionals who find employment in brokerages and investment banks must have the expertise necessary to take on the complex financial tasks of their roles. Investment banks and brokerage firms share many similarities. Although, there are several differences between these two types of financial entities. This article attempts to explain the concepts of investment banks and brokerage firms and draw the main differences between the two closely connected topics. A brokerage firm is an entity that provides intermediary services to individuals facilitating sales and purchase transactions. Investment banks undertake to perform complex and challenging financial services like underwriting, research, trading and sales, wealth management, asset management, initial public offerings, mergers, securitized products, hedging, etc.

Investment Bank vs Brokerage Firm

The key difference between investment banks and brokerage firms is that brokerage firms have customers who want to buy and sell securities, while an investment bank has customers who want to uplift their money. The time for an investment bank is usually from medium to long, while the period for a brokerage firm is short to medium. Investment banks earn income from fees, commissions, profit on trading activities etc. Brokerage firms, on the other hand, earn their income from real estate advisory, providing loans to clients, health cards, gold refining, etc. Investment bank offers customer-specific services, like financial and tax advice, while brokerage firm offers services like money management, estate planning etc. A brokerage has clients who want to buy and sell things. The client or the client's advisor decides to buy some stock, and the broker has some arrangement with the stock exchange to buy it, etc. The broker is paid a commission to do this.

An investment bank has clients who want to raise money. The investment bank assists those clients in issuing stock or issuing bonds, etc. The investment bank might prepare marketing material, help structure the transaction, securitize receivables, etc.

Difference Between Investment Bank and Brokerage Firm in Tabular Form

Table: Investment Bank vs Brokerage Firm
Parameters of Comparison
Investment Bank
Brokerage Firm
Definition
Investment banks can be defined as financial institutions that undertake to perform complex and challenging financial services like underwriting, research, trading and sales, wealth management, asset management, initial public offerings, mergers, securitized products, hedging, etc.
A brokerage firm can be defined as an entity that provides intermediary services to individuals facilitating sales and purchase transactions.
Time period
The time for an investment bank is usually from medium to long.
The time for a brokerage firm is short to medium.
Purpose
Brokerage firms have customers who want to buy and sell securities
An investment bank has customers who wish to uplift their money.
Mode of income generation
Investment banks earn income from fees, commissions, profit on trading activities etc.
Brokerage firms earn their income from real estate advisory, providing loans to clients, health cards, gold refining, etc.
Services offered
Investment banks offer customer-specific services, including financial and tax advice.
Brokerage firms offer services like money management, estate planning etc.
Needs of clients
An investment bank has clients who want to raise money. The investment bank assists those clients in issuing stock or issuing bonds, etc. The investment bank might prepare marketing material, help structure the transaction, securitize receivables, etc.
A brokerage has clients who want to buy and sell things. The client or the client's advisor decides to buy some stock, and the broker has some arrangement with the stock exchange to buy it, etc. The broker is paid a commission to do this.
Fee structure
Since investment bankers are required to invest a lot of energy into the sale even though there is no assurance of closing, they charge a monthly retainer that is credited toward the success fee, which is a structured commission on the final sale.
Brokers receive a particular percentage as a commission on the transaction after the deal closes, somewhere around 10%.

What is an Investment Bank?

Investment banks can be defined as financial institutions that undertake to perform complex and challenging financial services like underwriting, research, trading and sales, wealth management, asset management, initial public offerings, mergers, securitized products, hedging, etc. The investment bank assists those clients in issuing stock or issuing bonds, etc. The investment bank might prepare marketing material, help structure the transaction, securitize receivables, etc.

Their main goal is to create a relationship or strong connection between huge organizations and the shareholders and the stockholders.

They provide services to their clients in many ways, including helping government and institutions in providing them complete and proper security measures, helping investors in buying stocks and commodities, providing advisory services and so on. Even though investment banks have outside customers, they trade their accounts. Therefore, a dispute of engrossment can take place. The banks earn their income by charging fees for their advisory services. Examples of investment banks- are JP Morgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank.

Services provided by investment banks:

  1. Approval of proving security measures.
  2. Raising of capital
  3. Services involving research
  4. Advisory services
  5. Asset Management services
  6. Union and investment services
  7. Income and wealth services

Investment bank as an intermediary

Investment banks are well known for their work as intermediaries between a corporation and the financial markets. They help companies issue shares in an initial public offering as well as an additional stock offering. They also arrange for debt financing for corporations by finding large-scale investors to invest in corporate bonds.

The advisory role of an investment bank begins with pre-underwriting counselling and continues even after the distribution of the securities. The investment bank is considered responsible for examining a company's financial statements for accuracy as well as for publishing the prospectus that describes the offering in detail to investors before the securities are available for subscription. Clients of investment banks include corporations, pension funds, other financial institutions, governments, and hedge funds.

Investment bank as a financial advisor

Being a financial advisor to large institutional investors and corporate individuals, an investment bank may provide strategic advice on various financial matters. They succeed in accomplishing this mission by understanding their clients' objectives, industry, and global markets with a strategic vision that is necessary to spot and evaluate short- and long-term opportunities and challenges.

How does an investment bank aid in mergers and acquisitions?

Facilitating mergers and acquisitions is a vital element of an investment bank's function. An investment bank estimates the value of a potential acquisition and also helps negotiate a fair price for it. It even assists in structuring and facilitating the acquisition to make the deal go as smoothly as possible.

What is a Brokerage Firm?

A brokerage firm can be defined as an entity that provides intermediary services to individuals facilitating sales and purchase transactions. Brokers are paid in commissions or fees that are charged once the transaction has been completed and successful. Thus, a broker is essentially a middleman. Brokers match buyers with sellers and complete the transaction between the two parties, hence pocketing a fee for their service.

When an online brokerage is used to buy stock, there's no human standing between the investor and the transaction. The brokerage software makes the match. When a full-service brokerage is used, the process is mostly the same. However, someone else is pressing the keys on the keyboard. But, the full-service brokerage may have identified a good investment opportunity, discussed it with the client, and acted on the client's behalf in making the transaction. Generally, brokerages charge a fee for every transaction. Online brokers who offer free stock trades receive fees for other services, as well as fees from the exchanges. Full-service brokerages are increasingly charging a so-called wrap-up fee, an all-in-one charge for all or most services.

Services rendered by brokerage firms

  1. Services regarding the execution of trades
  2. Storage or safekeeping of securities
  3. Investment advise and research services
  4. Cash Management Services
  5. Low commission services

Types of brokerage firms

  1. Full-Service Brokerage-Full-service brokerages are also known as traditional brokerages. They offer a range of products and services, including money management, estate planning, tax advice, and financial consultation. They also offer stock quotes, research on economic conditions, and even a detailed analysis of the market. Highly trained and accredited professional brokers and financial advisers are available to advise their clients on money matters. Traditional brokerages often charge a fee or a commission, or sometimes, both. Many full-service brokers seek affluent clients and establish minimum account balances required to obtain their services. They often start at six figures or more. Some full-service brokerages also offer a lower-cost discount brokerage option as well.
  2. Discount brokerage- A discount brokerage is an online brokerage. The online broker's automated network acts as the middleman, handling buys and sells orders that are input directly by the investors. As they have evolved, brokerages have added tiered services at premium prices. A high level of competition on the web as well as on phone apps has led a large number of competitors to drop their fees to zero for basic stock trading services.
  3. Robot-advisors- A robot-advisor is an online investment platform that uses algorithms to implement trading strategies for its clients in an automated process. Most robot advisors are programmed to follow long-term passive index strategies, although several robot advisors allow clients to modify their investment strategy slightly if they want more active management. Some even have human advisors waiting backstage. Robot advisors have their appeals, one of them being very low entry fees and account balance requirements. Most charge no annual fee, charge zero commissions, and set their account requirements to a small amount.

Main Differences Between an Investment Bank and a Brokerage Firm In Points

  • Brokerage firms have customers who want to buy and sell securities, while investment banks have customers who want to uplift their money.
  • The time period for an investment bank is medium to long term, while it is short to medium for a brokerage firm.
  • Investment banks earn income from fees, commissions, profit on trading activities etc., while brokerage firms earn their income from real estate advisory, providing loans to clients, health cards, gold refining, etc.
  • Investment banks offer customer-specific services, including financial and tax advice, whereas brokerage firms offer services like money management, estate planning etc.
  • An investment bank has clients who want to raise money. The investment bank assists those clients in issuing stock or issuing bonds, etc. A brokerage has clients who want to buy and sell things. The client or the client's advisor decides to buy some stock, and the broker has some arrangement with the stock exchange to buy it, etc.
  • Since investment bankers are required to invest critical energy into the sale with no assurance of closing, they charge a monthly retainer which is a structured commission on the final sale.     Brokers receive a particular percentage as a commission on the transaction after the deal closes.

Conclusion

It is important to study more about investing and exactly how everything works and to figure out individual investment goals. Investment banks and brokerage firms are two types of financial institutions that provide services to investors who wish to invest in long-term financial growth and generate passive income. Many professionals employed in brokerages and investment banks must have the required expertise to take on the complex financial tasks associated with their roles. This article has attempted to explain both concepts and draw the differences between the two. It has covered the significant differences between an investment bank and brokerage firm in a tabular form as well as in points. It has explained the concept of an investment bank, its services as well as its functions as an intermediary and financial adviser. It has further explained the concept of a brokerage firm in detail.

References

  1. www.fintecbuzz.com

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