Through commercial banking, banks obtain funds from willing savers and then loan them out to investors (Iannotta, 2010). Investment banking is therefore all other activities that are not inclusive of the characteristics of commercial banking. Such activities include: underwriting services, advisory services, asset management and trading and brokerage. Underwriting services enable companies to access funds in the financial markets. On the other hand, advisory services help corporations to make major business decisions such as mergers and acquisitions; trading and brokerage involves sale of securities using either the bank’s or the client’s money.
Asset management on the other hand involves management of the investor’s money. One of the ways through which banks create business is through credit cards. Banks use credit cards instead of cash to transact as they are considered better than cash. This is because compared to cash loss; the loss of credit cards does not result in the loss of money.
Credit cards are a form of loan given by the banks. The users have a stipulated amount that they are required to pay every month. In addition to this, most of the credit cards have limits and the users are required to pay 2 percent of the allocated amount each month. The use of credit cards is made complex by people despite being relatively simple. An advance of 100 dollars draws the need to pay 10 dollars per month. However, when people take large advances and are unable to pay back in time, the credit card system eventually fails. Those who own stock in a company are referred to as the company’s shareholders (Pandey, 2006). In this case, tock is defined as the residual amount of assets that can be discharged following the settlement of the company’s claims.
The shareholders can own two types of stock in a company. These include common stock and preferred stocks. While the common stock enables the shareholders to vote in general meetings, the preferred s tocks do not confer the same rights to vote. However, the preferred stocks have an advantage over the common stocks since they are paid before the common stocks. The company ownership is linked to the amount of stock owned by the shareholders. To take complete control of the company, a shareholder needs 51 percent of all the company’s stocks.
Investment companies stock up assets that are bound to generate wealth in the future. Any investors have to carry out a trade- off between the investment risks and the expected returns. Low risk investors only collect investments with low risk levels in their portfolios while high risk investors stock high risk investments in their portfolios. Other investors stock a mix of low and high risk investments in their portfolios (Brigham and Houston, 2004).
Banks also offer loans to customers. Loans are described as financial amounts that are advanced to individuals to be paid back later with interest. Although loans are usually advanced for investment purposes, the loan amount can be used for a variety of things. The investments are however preferred as they yield the funds that can be used to pay the loan refund. As such, the relationship between a loan and an investment is such that the loan is taken to fund the investments and the investment in turn funds the loan refurbishment.
Brigham, E. F., & Houston, J. F. (2004). Fundamentals of financial management. Mason, Ohio: Thomson/South-Western.
Iannotta, G. (2010). Investment banking: A guide to underwriting and advisory services. Berlin: Springer.
Pandey, I. M. (2006). Finance: A management guide for managing company funds and profits. New Delhi: Prentice-Hall of India.
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