What Are Buy side vs Sell Side: The Ultimate Guide
If you are associated with the finance domain, either as a professional or as a student, you must have often heard the terms - Buy Side vs. Sell Side in your day-to-day interactions.
But do you know exactly what these terms mean in the relevant context?
This article aims to provide insights into the technicalities involved in the above-mentioned two concepts.
Let me start by explaining these concepts in a simplified manner to you.
Buy Side vs. Sell Side Meaning
You can ascertain by the name, Buy-Side is associated with the entities that are involved in making the investments.
These entities can be individual investors or companies involved in investing money for future returns.
The risk factor is always higher on the buy side as the decision to invest is the sole responsibility of the buy-side analyst or buy-side firm.
On the other hand, Sell-Side is associated with the entities which facilitate the decision-making and raise capital for the buy-side entities.
These entities, again, can be individuals or companies and typically operate within a specific sector or industry segment.
The risk involved is less on this side, as the decision is not theirs to make, and their sole responsibility is to present their opinion and estimates.
Sell Side vs. Buy Side in Investment Banking
Buy-side in investment banking refers to the clients of investment banks.
Typically these are large corporates from across industries that are concerned with buying investment services.
These clients deploy capital at a certain point and at a certain price suggested by the investment bank for generating future returns.
Buy-side can also refer to a client buying merger and acquisition advisory from an investment bank.
In general, an investment bank is a sell-side entity that provides the buy-side with advisory services to make a rational decision.
These advisory services are usually for sales & trading, raising capital, and mergers and acquisitions.
Investment banks provide insights, trends, projections, and analysis of investment options and make recommendations for a higher return in the future.
However, in some cases, investment banks can also be categorized as buy side, for example, fundraising done by investment banks on behalf of the client.
Buy Side vs. Sell Side in Equity Research
In equity research, buy-side refers to the companies involved in investing their own money or their client’s money in the capital markets.
These companies, and in some cases individuals, would make the investment decisions not just on the basis of the performance of the stock or the company but also the performance of the markets and other macroeconomic factors.
The work of buy-side analysts revolves more around validating the research done by sell-side companies.
This is usually done by talking to experts in the industry and deriving robust financial conclusions.
On the other hand, the Sell-side in equity research refers to the broking and financial research firms that track equity stocks, analyze them, and derive an opinion for the clients.
These companies are aplenty and usually focus on a particular industry sector or type of company (blue chip, mid-cap, small-cap, etc.).
Companies on the sell side closely track stocks, companies, their performance, and forecast.
Their work usually revolves around annual reports, balance sheets, quarterly results, and published data available in the public domain.
Buy-Side and Sell-Side Analysts
The type of work that analysts do, either buy-side or sell-side, is very similar.
Again, the objective is to identify the most profitable and high-return investment avenue.
All analysts are expected to do their own research and create reports on the basis of their analysis.
But the intensity and depth of work differ a lot.
The research reports created by a buy-side analyst are only available to the company internally, whereas reports created by sell-side analysts are available in the public domain.
Usually, the buy-side analyst uses reports from multiple sell-side analysts and furthers the analysis by creating their own reports.
Also, the job of a sell-side analyst is to determine whether the investment option should be recommended or not. Still, a buy-side analyst must move up a notch and understand whether the investment option is in line with the company's strategy.
In other words, a sell-side analyst's accountability (and also the risk involved) is far less compared to a buy-side analyst.
The question that a sell-side analyst answer is – “Is this stock good?’’ as against a buy-side analyst who answers ‘’ Is this stock good for my company?’’.
A higher skill set (financial modeling) and knowledge of financial concepts are required for buy-side analysts when compared to their counterparts on the sell side. Therefore buy-side analysts usually make more money than sell-side analysts in the industry.
If you want to pursue a career in buy-side, I would suggest spending a few years working as a sell-side analyst to understand the basics and then apply them to your buy-side job profile.
Buy-Side and Sell-Side Firms in the Financial Market
In simple terms, buy-side firms are entities that make the actual investment.
These firms typically are asset management firms, venture capitalists, hedge funds, mutual funds, private equity funds, institutional buyers, and investment advisors.
Buy-side firms are usually bigger in terms of operations, but the number of analysts is smaller who often deal with multiple sell-side entities for making the investment decision.
Sell-side companies and firms are broker houses, research companies, and investment banks.
The number of analysts in these companies is higher when compared to buy-side firms, with analysts dedicated to specific sectors of companies and industry verticals.
Sell-side firms are smaller in terms of operations and typically have limited capabilities.
This is one of the reasons why the sell-side analysts are paid lower than the buy-side analysts.
Many of us are regular investors in stocks where we buy or sell equities. We conduct stock trade through research reports, stating which equities to buy and which to sell at what time.
This decision of ours is largely dependent upon experts’ advice. These experts are officially known as sell-side analysts.
In stock trading, there are two kinds of analysts – the buy-side and the sell-side. The buy-side analysts are those who are involved in raising investment capital and deciding where to invest the capital.
The sell-side analysts pitch financial products like bonds, stocks, or companies to investors and persuade them to buy them.
While a sell-side analyst works in a stockbroking firm, a buy-side research analyst has to work with mutual funds, pension funds, or hedge funds.
In this article, we will look into sell-side equity research in detail, regarding their roles and responsibilities, enabling you to understand their communications to you as an investor. Perhaps, you can think of becoming a sell-side equity research analyst yourself!
Secrets in Sell-Side Securities Research
Simply put, the job of a sell-side analyst is to recommend stocks to people.
Other than that, a sell-side analyst writes a Sell-Side securities Research Report that is expressive of his or her opinion, enabling investors to decide whether buying or selling certain stocks will be profitable or not.
The sell-side securities research analyst has the job of following a list of companies and regularly researching them for the clients of the firm employing them.
The clients are comprised of individual investors, small businesses, and corporations.
To ease the research process, the researcher builds financial models to keep track of the financial changes happening in the list of companies and communicate with competitors and suppliers; customers are other sources to generate holistic company research profiles.
These research works are reflected in the form of reports made accessible to the public.
The report will generally be detailed research and recommendation on why some stock is or isn’t a good investment in the long-term or short-term.
For their research and analytical skills (financial modeling), the researcher is usually paid about 60,000 USD to 90,000 USD annually.
The salary range differs with profile role and responsibilities, work experience, and educational knowledge.
A sell-side Securities research interview is most of the time practiced and trained. Stocks that are rated sell in these interviews aren’t considered to have much potential.
These equities will tumble down soon because they have been rated sell. Equities that are bound to go up are rated as a buy.
The 3 Secrets
A sell-side securities research analyst will tell you whether you should buy, sell or hold a particular stock. These sell-side securities research analysts are appointed by investment banking firms to advise customers.
These research analysts develop secret methods of recommending stocks. I have come across many people who blindly follow the advice experts give, but should they?
I know they are experts; therefore, their recommendations carry value, but should you trust them blindly?
Let’s see. In this article, I will briefly point out 3 secrets of sell-side securities research analysts. The analysts won’t even let you on these, so read and remember.
1. Sell-side doesn't prioritize individual investors.
This is a shocking and bitter truth, but it is how it is. As individual investors, you expect equity researchers to treat you equally, at par with big-shot investors, but you aren't.
Equity research isn't carried out with the purpose of helping out individual investors. In fact, an individual investor is the last thing on the mind of an analyst while conducting research.
It’s true that individual investors benefit from these research reports, but they are not made keeping the individuals in mind.
Equity researchers draw up these reports for corporate or high-value investors.
2. The stock depends on the statements of the analyst.
Yes, even this is true, and it would strike you immediately if you applied logic and common sense.
When you buy or sell a stock, it is always on the research analyst's recommendation, right? Therefore, when an analyst rates the stock as a ‘sell,’ those who follow his or her advice sell the stock almost instantly.
This obviously results in a fall in the prices of these stocks.
Hence, it would be safe to say that the plight of the stocks is largely dependent upon the sell-side research analyst.
Now, whether you should listen to the advice of the analysts or not brings us to the third secret, and it is doubly shocking!
3. Unqualified analysts
Ideally speaking, an analyst ought to have an MBA degree and a CFA certification.
Being a sell-side research analyst calls for high skill levels because a lot of money is involved here, and people want the best profit margin.
However, the bitter truth again is that only 3/4th of the sell-side analysts are qualified, while the others simply learn on the job.
Most of them aren’t even MBA or CFA certified. It’s acceptable to learn on the job, but sometimes, the firm hires less qualified and less skilled individuals to control company costs.
This, in turn, poses the firm customers at risk because the customers/investors rely on the analytical abilities of the sell-side researcher.
Therefore, given the fact that some firms engage in flawed recruitment drives, it is very easy to enter the job market. Still, the redeeming factor is that one needs to prove their skills and analytical abilities to make a successful career as a sell-side research analyst.
The demand for qualified sell-side research analysts is high due to scarcity in the market.
To become a top-class equity research analyst, you have to be yourself. Be more of yourself and start polishing your skills. Many people are working on it. And you as well?
If you want to make a career in investment banking, hedge funds, and pension funds, you should know the buy-side vs. sell-side and have awesome expertise in financial modeling.
I hope this article gave you a clear distinction between the buy-side and sell-side in the finance domain. If you have any questions, please feel free to write back.