If you are associated with finance domain, either as a professional or as a student, you must have often heard the terms - Buy Side and Sell Side in your day to day interactions.
But do you know exactly what these terms mean in the relevant context?
This article is aimed at providing you with insights on 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 decision to invest is 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 of the buy side entities.
These entities again can be individuals or companies, and are 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.
Buy Side vs. Sell Side in Investment Banking
Buy side in investment banking refers to the clients of investment banks.
Typically these are large corporates from across industries which are concerned with buying investment services.
These clients are involved in deploying capital, at a certain point and at a certain price suggested by the investment banks, 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 the 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 the 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 fund raising 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 that are 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 macro-economic 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 are usually focused on a particular industry sector or type of companies (blue chip, mid cap, small cap etc.).
Companies in sell side closely track stocks, companies, their performance and forecast.
Buy Side vs. Sell Side Analysts
The type of work that analysts do, either buy side or sell side is very similar.
The objective again is the same i.e. identifying 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 differs 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 buy side analysts use reports from multiple sell side analysts, and further the analysis for creating their own reports.
Also, the job of a sell side analyst is to determine whether the investment option should be recommended or no, but a buy side analyst has to move up a notch and understand if the investment option is in line with the company strategy or not.
In other words, the accountability (and also risk involved) of a sell side analyst is far less when compared to a buy side analyst.
The question that a sell side analyst answers is – “Is this stock good?’’ as against a buy side analyst who answers ‘’ Is this stock good for my company?’’.
A higher skill set and knowledge of financial concepts is required for buy side analysts when compared to their counterparts in 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 spend a few years working as a sell side analyst to understand the basics and then apply them in your buy side job profile.
Buy Side vs. Sell Side Firms
In simple terms, buy side firms are entities that make the actual investment.
These firms typically are asset management companies, venture capitalists, hedge funds, mutual funds, private equity funds along with 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 for specific sectors 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.
If you want to make a career in investment banking, you should know the buy side and sell side.
Hope this article gave you a clear distinction between buy side and sell side in finance domain. If you have any questions, please feel free to write back.
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