What do the terms “sell-side” and “buy-side” mean in the world of finance? Let’s try to demystify them.
Difference between sell-side and buy-side
What does a sell-side firm do?
The sell-side comprises professionals who represent companies that need to raise capital by selling securities. Sell-side institutions include investment banking and commercial banking firms, and sell-side individuals include stock brokers and market makers. They facilitate the sale of securities on behalf of their clients who want to raise capital.
For example, an electronics company that is planning to expand its factory would approach an investment banker and ask the banker to help it raise money for the project. The banker would prepare an analysis with financial modeling to ascertain how much investors think the company is worth. The banker would then prepare securities marketing material for distribution among potential investors.
Sell-side entities look to pitch and sell assets or other investment opportunities to buy-side entities. Sell-side entities monitor stocks and performance of companies and predict their financials based on trends and their own analysis. They make recommendations based on research, including the target prices of stocks, in their equity research reports. They sell their investment ideas to their clients, that is, the buy-side.
Sell-side managers are brokers and traders who hold assets for a short period and earn their revenue from fees related to transactions.
What does a buy-side firm do?
“Buy-side” represents organizations or individuals who have capital, and are looking to invest this capital for future returns. They buy securities in the form of shares, bonds, derivatives or other investment products sold by the sell-side. The goal of the buy-side is to ensure the best returns on their clients’ investments.
For example, let’s assume that an asset management firm is looking for fresh investment opportunities. One day, the portfolio manager of the firm is approached by a top functionary at the investment banker of the electronics company mentioned above, and told about the factory expansion project. The investment banker tells the portfolio manager of an upcoming initial public offering (IPO) for the project, and the portfolio manager decides to invest in the project by buying securities.
Besides asset management firms, the buy-side includes institutional investors, venture capital, private equity, retail investors, and hedge funds. Buy-side institutions also buy advisory services from sell-side institutions.
Sell-side vs buy-side: Which is a better career choice?
Differences in jobs, skills, salaries, company structure, work-life balance
As an article in corporatefinanceinstitute.com points out, the job roles in the sell-side and the buy-side depend on the functions that each side performs for the client and the personality types that are suitable for each side. But a fresher doesn’t need to pick a side immediately as he/she can jump ship later, according to lifeonthebuyside.com.
On the buy-side, analysts are more often able to see their research and analysis implemented, as well as the results, without any sales responsibilities that a sell-side analyst has to shoulder. Moreover, if you are a sell-side analyst, you are expected to provide inputs for capital-raising work at your firm’s investment bank, so there may compliance and other issues for you to tackle, taking your focus away from securities analysis and research.
This has made sell-side analysts leave big banks and set up research firms on their own or join boutique firms. Therefore, if you are looking for a job as a sell-side analyst, it might not be wise to look at just the big banks but also consider smaller firms where you can just research and analyze securities.
The roles of sell-side professionals include advising corporate entities on important transactions; facilitating raising of capital through debt and equity; marketing and selling securities; creating liquidity for listed securities; helping clients get in and out of positions; providing suggestions on mergers and acquisitions; conducting equity research for clients; writing reports and investment-opinion; performing financial evaluation and modeling; and building ties with corporates. Sell-side professionals study financials and annual reports, quarterly results, and balance sheets and put out recommendations. They convince investors to trade through their firm’s trading desk.
The roles of buy-side professionals involve managing clients’ assets; making investment decision (buy, sell, or hold); ensuring the best risk-adjusted returns on capital; researching investment avenues; and performing financial evaluation and modeling. Buy-side professionals study sell-side recommendations and make investments based on their own analysis and company strategy. They have to validate research reports provided by the sell-side, points out financewalk.com.
The skills required on both the sell-side and the buy-side may be similar in junior positions of analyst or associate, but at higher positions, with higher responsibilities, they vary.
Apart from salesmanship, the main skills required on the sell-side are research; financial modeling; Excel skills; pitch book management, client relations, deal initiation and closure; and ability to bring new business.
The important skills on the buy-side are research; financial modeling, Excel skills (these three are common skills shared with the sell-side), raising capital, and achieving rates of risk-adjusted returns.
As they are responsible for investment decisions ultimately, buy-side professionals need to study reports of sell-side analysts and also make their own analysis. Because of this, they are often thought to require deeper financial knowledge and higher analysis skills sets than sell-side analysts. They also require a keen eye for investment opportunities.
Sell-side analysts require analytical and quantitative skills; writing and communication skills, expertise in Excel, PowerPoint, and Word; ability to analyze financial reports of companies; ability to prioritize tasks, work long hours, and work on multiple projects; and commitment to outstanding results.
Talking about managers, an important responsibility of sells-side managers is to monitor the performance of stocks of different companies and make projections based on trends. They prepare research reports containing their recommendations and target prices. They analyze financial reports, quarterly results, and other data about companies.
The main responsibility of buy-side managers is to invest the capital in hand wisely. They use reports, analysis, and price reference from sell-side institutions such as investment banks to make investment decisions. They maintain a fund for investing activities. They take into account macroeconomic conditions, market performance, and the performance of companies and their stock.
While the sell-side has a hierarchical structure, including analyst, associate, vice president, and managing director, the buy-side has a leaner structure that includes portfolio manager, researcher, and marketing person, points out wallstreetmojo.com.
Typically, there are more generally career opportunities for a beginner on the sell-side than the buy-side, in equity research; investment banking, commercial banking; and corporate banking. However, since the financial crisis, sell-side analyst recruitment has waned as banks are under pressure to cut costs, says a 2016 article on efinancialcareers.com. But firms are still hiring entry-level and junior analysts.
On the buy-side, analysts specializing in credit research are in demand, particularly among smaller hedge funds. But the recruiters usually want analysts with five years’, sector-specific experience on the buy-side.
After a few years’ work and after attending analyst and associate programs at banks, finance professionals may move to the buy-side. The main career paths are found in wealth or portfolio management, private equity, venture capital, and hedge funds.
The paths for career advancement are clearer on the buy-side, reports schweser.com: analyst (two or three years), associate (three years or more), director, managing director, or VP. On the sell-side it is associate; analyst, senior analyst, VP/research director. The timeline on the sell-side is not as clearly defined as it is on the buy-side.
Buy-side analysts are often said to require a larger skillset than sell-side analysts and therefore command higher compensations.
As in many other careers, the salary and bonus depend on the position, company, city, and other factors. Buy-side professions get a performance bonus in the form of equity interest, or a fee plus commission as in hedge funds.
Buy-side research analyst can get an attractive base salary from $150,000 to $200,000 and a bonus component (90% – 100% of the base salary) that can double their total income. For senior roles the base salary increase. For example, a portfolio manager in a hedge fund can get a base salary of up to $250,000 while the head of equities or credit could get $350,000. The icing on the cake continues to be the bonuses.
Employees of sell-side firms, particularly investment banks, may have to report to clients at all times and therefore work longer hours. Since buy-side entities are the ones with the funds to invest, they lead a more relaxed and less hectic lifestyle. According to a Quoran, they can decide when to call a meeting or finalize a deal, for example. However, when there is a sharp deadline or if there is another buyer for the same asset, they are also required to work long hours.
– Asset management vs investment banking: Career choice
– How to get Hedge Fund jobs after MBA
– How to get a job on Wall Street
– Investment banking vs management consulting
References: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10