The Difference between Buy Side and Sell Side
The financial market is growing every second as businesses become more globalized. In order to meet the ever-increasing demands of these organizations, a number of financial institutions have been formed. However, with the passage of time, these institutions have been further categorized to better understand their operations. Two well-known and widely used examples of such categories in the financial world are buy side and sell side. These are financial industry terms for investment banks and investment managers. To get a better idea of the terms, let’s look at their definitions.
The buy side usually involves firms that have capital; they look for assets and opportunities to buy assets. The buy side represents the firms or institutes that are involved in the decision making process related to investments. The analysts working on this side manage portfolios for the investors or owner of the capital and get paid a flat percentage of assets under management. These institutes have a fiduciary duty to work in the interest of their clients and to place the interest of capital owners above their own interest. The clients can hand over their decisions to the buy side managers, who are accountable for the capital and should not use it to their own advantage beyond their share of the management fee. Examples of buy side include retail investing, venture capital, private equity, hedge funds, institutional investors, asset managers, and other institutional investors.
Sell-side firms are the ones that look to pitch the assets and opportunities for selling. They basically represent the entities that facilitate the decision making for the buy side. The managers on this side are the brokers and traders who hold the assets for a short period of time and earn their revenue from fees related to transactions. Although they do not have to abide by such high level fiduciary, they are still under an obligation to provide disclosures honestly and be fair in their dealings. Common examples of the sell side institutes are investment banks, market makers, brokerage firms, sales and trading, and other advisory services.
Both the buy side and sell side have a tendency to add or detract value from the bottom line of their clients, but there is a substantial difference between devising forecasts and managing clients’ capital. Therefore, in order to better understand these terms, given below are the differences between the buy side and the sell side.
When it comes to technical skills, buy-side managers require higher analytical and financial skills as compared to the sell side managers, because they are involved in critical decision making for investments. The sell-side manager must possess certain qualities, such as strong communication and writing skills, the ability to prioritize tasks, basic knowledge of MS Office, a commitment to achieving outstanding outcomes, skills to evaluate financial statements and businesses, the willingness to work longer hours to meet deadlines, and the quantitative skills needed to crunch the numbers.
On the other hand, buy-side managers must have the intellect needed to identify investment opportunities. They should also be able to monitor the constantly evolving market, create quality and timely reports for making investment decisions, analyze the industry and its inherent risks, have a competitive edge by staying up to date with the current status of the global markets, and monitor the performance of a portfolio.
The main responsibility of buy-side firms is to utilize their capital. They usually use the analysis or price reference provided by the sell-side institutions, such as investment banks, to make investment decisions. Moreover, they maintain a fund for investing activities.
Sell-side firms, on the other hand, closely monitor the performance of stocks and different companies, making future projections on the basis of trends and analysis. This leads them to devise a research report that contains the research recommendations, i.e., target price. These firms mostly sell ideas to their clients for free. Their job description usually involves analyzing financial reports, quarterly results, and any other data that are publicly available. Sell-side firms offer their services to buy-side firms to assist them in making decisions related to their investments.
Hierarchical Structure vs. Lean Structure
Buy-side firms follow a lean structure that involves three key roles, including the marketing personnel, researchers, and portfolio manager. Sell-side firms are more hierarchical, in that they have a managing director, a vice president, an associate, and an analyst.
Lifestyle of the Managers
Sell-side managers, especially investment bankers, are responsible for answering to their clients, and thus their job involves working long hours. Whereas, buy-side managers or analysts have an easier lifestyle than the sell-side managers because they are the ones with the money in their hand.
Buy-side companies invest their own funds and the funds of their clients in the capital market. While making an investment decision, they take into account the macroeconomic factors and market performance, along with the performance of firms and stocks. On the other hand, sell-side firms seem to rely on brokerages and financial research firms that keep track of equity stocks, evaluate them, and then form an opinion for their clients.
The goal of buy-side institutions is to make a profit from the investments they find for their clients; whereas, the sell-side managers are focused on giving advice and closing the deals. They conduct research to attract and persuade investors for trading on their platforms.
Buy-side firms have more to do with financial estimates and models because this information can be critical for them. Similarly, price targets and the buying and selling of call options hold more importance for buy-side firms than sell-side firms. It is very likely for a sell-side manager to be below average, especially in modelling exercises and selecting stocks, but that can be ignored as long as they provide meaningful information. On the other hand, buy-side firms cannot afford to make wrong decisions because those decisions can adversely affect the performance of their funds on a large scale.
There is no final verdict on which one of the two is better. In the case of the buy side, firms raise funds from investors and make their own investment and buying decisions. In the case of the sell side, firms pitch the stocks and other instruments to convince investors to buy them. Both buy-side and sell-side firms work to assist their clients and to add value to the financial system. They hold equal importance for effective functioning of the financial system. Buy-side analysts cannot play the role of sell-side analysts nor can they cover everything. However, a smart manager on the buy-side can instantly choose who they trust in the sell-side sector. In the same way, sell-side managers can dig deeper than buy-side managers and tend to learn the nitty-gritty of an industry for better decision-making.
While choosing a career, it is very important for finance professionals to understand the differences between the two sectors in order to identify the best fit for their skill set.
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