As a retail investor, there are times where you will have to rely to financial advice or tips to decide whether to buy, sell or hold a stock. Knowing which advice is in your best interest is critical to helping you make the right decision.
This is even made more complicated because in the world of investing, people who need your money do so because they either want you to invest an asset or help you invest in one. Either way they earn fees from you.
Therefore, it is important that you know who has a better incentive to get you to invest in your best interest. This is why, the world of investing in the financial market is divided into buy and sell side. They both want your money for one reason or the other.
In the Financial Services industry, companies or market operators are usually classified as either Buy-Side or Sell-Side. The buy side makes up one half of the financial market, and the sell-side make up the other, although some companies operate and do deals on both sides.
Buy-Side
Buy-Side companies buy large amounts of securities and assets for their own or clients’ accounts, and for money management purposes. Firms on the buy side are money managers that try to create value for their clients by purchasing assets that are under priced.
On the Buy Side of the Capital markets, we have professionals and investors that have money, or capital to buy securities. These securities include stocks, bonds, treasury bills, commercial papers, derivatives, real estates and a variety of other products that are issued by the sells side.
Examples of Buy-Side companies include; Insurance companies, Pension funds, Mutual funds, Private equity funds, Sovereign wealth funds, Trusts etc.
Characteristics of the Buy-Side
- Manage their clients’ money.
- Make investment decisions (buy, hold or sell).
- Earn the best risk-adjusted return on capital.
- Perform in-house research on investment opportunities.
- Perform financial modeling and valuation.
- Find investors and recruit capital to manage.
- Grow assets under management (AUM).
- Make money by buying low and selling high.
Firms on the buy side are money managers that try to create value for their clients by purchasing assets that are underpriced.
On the Buy Side of the Capital markets, we have professionals and investors that have money, or capital to buy securities. These securities include stocks, bonds, treasury bills, commercial papers, derivatives, real estates and a variety of other products that are issued by the sells side.
Sell-Side
The Sell-Side consists of institutions that are selling research, advisory and other financial services to its clients. Sell-side companies make money through fees and commissions, so their primary goal is to work on as many deals as possible
The sell side is made up of brokerage firms, investment banks and other entities that make buy/sell recommendations, upgrades, downgrades, target prices and research options investors can use to make investing decisions.
Characteristics of the Sell Side:
- Advise corporate clients on major transactions.
- Facilitate raising capital including debt and equity.
- Advise on mergers and acquisitions.
- Win new business (build relationship with corporates).
- Market and sell securities.
- Create liquidity for listed securities.
- Help clients get in and out of positions.
- Provide equity research coverage of listed companies.
- Perform financial modeling and valuation.
- Make Money through fees and commissions.
Analysts are employed both on the buy side and the sell side, but they do very different things.
Buy side analysts conduct research for internal use only – if they derive a formula or strategy that can help their firm beat the market, they keep it from the public.
For example if a bank would employ its in-house investment analysts who will be responsible for deriving formulas or strategies to help the company achieve high returns. These strategies will not be revealed to the public.
Sell side analysts on the other hand conduct research for the public. They provide research to clients so they can make better investing decisions.
For example, a company that needs to raise money will call up an Investment Bank to help issue either debt or equity. The bankers will prepare an analysis on the necessity and viability of raising capital with extensive financial modeling techniques.
