Financial markets are composed of two main sectors: sell-side and buy-side. Whether you are a business owner seeking to expand your firm, looking for career opportunities as a buy or sell-side analyst, or you simply want to gain a better grasp of how capital markets operate, it is imperative to understand the fundamentals of each side, how they differ, and how they work together to create a functioning investment and capital system.
Essentially, sell-side is the sector of the financial market that is all about creation, promotion, and selling traded securities to the public. On the other end, buy-side deals with purchasing and investment of large portions of securities for purposes such as fund management.
Buy-side refers to individuals or companies buying securities, including pension funds and hedge funds. Contrarily, sell-side refers to companies that issue, sell, or trade securities. The types of firms on the sell-side typically include investment banks, advisory firms, and corporations. These organizations usually offer greater opportunities for aspiring analysts than those in buy-side. This is often largely due to the sale dominate nature of the business.
In the investment banking industry, it is paramount to know the difference between buy-side and sell-side. The two sides create the full picture and rely on each other for the other’s prosperity.
The buy-side of the capital markets has professionals and investors with money or funds to buy securities. These securities 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 running a fund invests a high net worth of clients' money into alternative energy companies. The portfolio manager at the firm seeks opportunities to utilize those funds by investing in securities from companies that they assess to be the most attractive in the industry. On a particular day, the vice president of equity sales at a major investment bank calls the portfolio manager and notifies them of an upcoming initial public offering of the company in the alternative energy. The portfolio manager decides to invest and buy the securities, stimulating the money to flow from the buy-side to the sell-side.
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, advisory firms, or any other firm that facilitates the selling of securities on behalf of their clients.
For example, a corporation that needs to raise money to build a new factory will contact their investment banker and ask them to help issue either debt or equity to finance the factory.
The bankers then prepare an analysis, with the aid of extensive financial modeling, to determine what they believe investors will think the company is worth. They then prepare a diverse array of marketing materials and distribute them to potential investors, e.g. those on the buy-side, thus completing the circular flow of capital in financial markets.
The largest and most renowned firms and banks on the buy-side are as follows:
The following list catalogues the largest, most profitable, and otherwise notable investment banks. This list of investment banks notes full-service banks, financial conglomerates, independent investment banks, private placement firms and notable acquired, merged, or bankrupt investment banks.
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 work for brokerage firms and evaluate companies for future earnings growth and other investments criteria. Sometimes, they may place recommendations on stocks or other securities, which typically are phrased as buy or sell or hold as well as offer recommendations to their clients.
Buy-side analysts customarily work for buy-side money management firms, which include mutual funds, pension funds, trusts and hedge funds. These individuals are trained to identify investment opportunities that will improve the net worth of their client’s portfolio. Typically, they provide research and recommendations exclusively for the benefit of the firm's own money managers.
Buy-side compared to sell-side in mergers and acquisitions refers to firms who sell products like stocks and bonds. For those on sell-side, an analyst’s job is to entice investors to purchase these products. On the other hand, those on buy-side utilize capital to procure these securities or firms that are for sale.
The buy-side process begins by raising the funds from the investors and then deciding where to invest and what to buy. In a M&A context, buy-side ecompasses working with the buyers and finding opportunities for them to acquire other businesses. Contrarily, sell-side in M&A terms entails working with the seller who is trying to find a counterparty for the sale of a client's business.