Financial markets consist of two main parties: sell-side or the sellers and buy-side or the buyers. The fundamental difference between buy-side and sell-side is straightforward: one party is buying, the other party selling.
Difference between Sell-side and Buy-side:
The Buy-Side refers to firms that securities and includes investment managers, pension funds, and hedge funds. The Sell-side refers to firms that issue, sell, or trade securities, and includes investment banks, advisory firms, and corporations. Aspiring analysts have more opportunities in Sell-Side firms than Buy-Side firms usually have, because of the sales nature of their business.
The buy-side and the sell-side complete the full picture of the financial sector and both are indispensable to each other with the ins and outs of the financial market.
Buy-Side – buys and invests large portions of securities for the purpose of money or fund management.
Sell-Side – deals with the creation, promotion, and selling of traded securities to the public.
About the Sell Side
On the Sell Side of the capital markets, professionals represent corporations that need to raise money by SELLING securities (hence the name “Sell Side”). The Sell-Side mostly consists of banks, advisory firms, or other firms that facilitate the selling of securities on behalf of their clients.
For example, a company needs to raise money to build a new factory it will call it’s investment banker and ask them to help issue either debt or equity to finance the factory. The bankers then analyze the request, with the aid of extensive financial modeling, to determine the worth of the company from the investors point of view. Next, they prepare a variety of marketing materials and distribute them to potential investors. This is where the Buy Side comes in to the picture.
About the Buy Side
On the Buy Side of the capital markets, professionals and investors who have money, or capital, BUY securities. These securities can include common shares, preferred shares, bonds, derivatives, or a variety of other products that are issued by the Sell Side.
For example, an asset management firm runs a fund that invests the high net worth clients’ money in alternative energy companies. The portfolio manager (PM) at the firm looks for opportunities in the most attractive companies in the industry to invest that money to work by investing in its securities. The PM decides to invest and buys the securities. This is how the money flows from the buy-side to the sell-side.
Role of the Sell Side vs Buy Side
The main difference between the sell-side vs buy-side in the capital markets is the role each side plays for their client and the personality types that do well on both side.
The Role of the Sell Side:
- Advise about major transactions to their corporate clients
- Facilitate raising capital, including debt and equity
- Advise on mergers and acquisitions (M&A) deals
- Build relationships with corporates to win new business
- Market and sell securities
- Create liquidity for listed securities
- Help clients buy and sell by advising on when to get in and out of positions
- Provide equity research coverage about listed companies and advise about the results of the research.
- Perform financial modeling and valuation
The Role of the Buy Side:
- Manage finances for their clients
- Advise and make investment decisions about buying, holding, or selling.
- Guide and enable to 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)
Buy-side Activities and Motivation
The buy-side of the capital markets has professionals, investment experts and investors with money or funds to buy securities. These securities can be shares, preferred shares, bonds, derivatives, or a variety of other products that are issued by the sell-side.
For example, an asset management firm running a fund can advise its high net worth clients to invest into alternative or renewable energy companies.
The main skills are:
- Extensive industry knowledge and expertise
- Excel proficiency
- Financial modeling
- Communication and people management skills
- Capital raising ability
- Accomplish targeted rates of risk-adjusted return
- Compiling research reports
Sell-side Activities and Motivation
On the sell-side of the capital markets, there are professionals who represent corporations that raise capital by selling securities. Generally, sell-side consists of banks, investment advisory companies and experts, or any other firm that facilitates the selling of securities on behalf of their clients.
The main skills are:
- Industry research and analysis
- Excel proficiency
- Financial modeling
- Handling of client relationship
- Design, prepare and perform pitch-book presentations
- Acquire new clients and businesses
- Selling and closing deals
- Compiling research reports
Sell-Side Careers
There are more wide ranging career options available on the sell side, with more entry-level opportunities than those available on the buy-side.
Main sell-side jobs:
- Investment Banking
- Equity Research
- Sales & Trading
- Commercial & Corporate Banking
Buy-Side Careers
Finance professionals usually switch-over to the buy-side after spending a few years on the sell-side. Banks tend to be great training grounds, with their various analyst and associate programs, which typically last two to four years. After taking the training most analysts or associates look out for opportunities to move to the buy-side.
Main buy-side careers include:
- Portfolio Management
- Wealth Management
- Private Equity
- Venture Capital
- Hedge Funds
Sell-Side Analyst and What Does He Do?
Sell-side analysts, often referred to as equity research analysts, work in investment banking, equity research, commercial banking, corporate banking or sales, and trading. These individuals seek careers in brokerage firms and evaluate companies for future earnings growth and other investments criteria. Sometimes, they also make stock recommendations or other securities recommendations, which typically could be to buy or sell or hold.
Buy-Side Analyst and What Does He Do?
Buy-side analysts work for buy-side finance management companies, which include mutual funds, pension funds, trusts and hedge funds. They are professionals trained in identifying investment opportunities that will improve the net worth of their client’s portfolio. They provide research and recommendations exclusively for the benefit of the firm’s own money managers.
Buy-Side vs Sell-Side Compensation
Total compensation package including salary and bonus varies widely depending upon the position, the company, the city, and a lot of other factors. Therefore it’s difficult to make generalizations about the compensation differences of the sell side vs buy side. But there are a few points to keep in mind:
Buy-side careers require more experience, and professionals often “graduate” from the sell-side to the buy-side.
Buy-side careers have a performance bonus element which can lead to significant upside potential income if the recommended investments perform well. It could be a carried interest in private equity or the 2-and-20 structure in hedge funds.
Sell-side jobs also have performance bonus incentives, which can be based on both personal performance, as well as on the performance of the company.
It’s generally perceived that more money can be made on the buy side, but that does not mean the income of an investment banker on the sell-side is any less comparatively.
How Do The Buy Side and Sell Side Earn a Profit?
Buy-side companies make profits by buying at a low price and selling high trade activities. They create value by identifying and buying underpriced securities. For instance, a buy-side analyst who is monitoring the price of a technology stock observes that its price has dropped as compared to other stocks, yet the tech company’s performance is still high. The analyst may then make an assumption that the tech stock’s price will increase in the near future and based on this research, the buy-side firm will recommend a buy of that stock to its clients.
Sell-side firms earn their profit through fees and commissions. Therefore, their chief objective is to make as many deals as possible. These market makers are a formidable force on the sell side of the financial market. They engage in foreign exchange markets by buying and selling a substantial volume of currencies, underwriting and managing bond issues bought directly from the US Treasury, dominating the stock market via underwriting stock issuance, taking proprietary positions, and selling to both companies and individual investors.
Conclusion:
Both Buy-side and Sell-side are very important for a M&A and are very lucrative prospects for firms and professionals with the right background, expertise and proficiencies.
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