You will often come across the words sell-side and buy-side in the finance world. Finance professionals commonly use both these words to give an idea of their job profile. Even though these are standard terms in the financial world, people often confuse their meaning and usage. To better understand the meaning and usage of both these terms, we need to understand the difference between sell-side vs. buy-side.
It is crucial to understand what these terms mean before we detail the differences between the sell-side vs. buy-side.
- Sell-Side vs. Buy-Side – Differences
- Sell-Side vs. Buy-Side – M&A Context
It deals with the investment banking industry. The primary function of those working on the sell-side is to help companies raise funds via debt and equity. They also help the companies to sell those securities to institutional investors, including pension funds, hedge funds, insurance companies, and more.
In simple words, we can say that the sell-side professions help create, promote, and sell the securities to the general public and institutional investors. A few examples of sell-side firms are banks, advisory firms, and other companies that assist their client in selling their securities and thus arranging funds for those firms.
It primarily refers to institutional investors or those investors who invest in the securities. We can also say that they represent part of the financial market that buys and invest in securities with the objective of fund management. Asset management firms, hedge funds, and insurance companies are some excellent examples of buy-side firms.
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Sell-Side vs. Buy-Side – Differences
Following are the differences between the sell-side vs. buy-side:
What is it?
As the name suggests, Sell-side allows companies to sell their securities to investors, including institutional investors. On the other hand, the buy-side are the entities that buy securities from the sell-side entities or the issuer for fund management.
Major sell-side participants are investment banks, commercial banks, stockbrokers, and market makers. Major buy-side participants are hedge funds, insurance companies, asset managers, and trusts.
The difference in Firms Involved
Buy-side firms are usually big institutions with massive operations. They are always on the lookout for excellent investment opportunities to deploy the funds they have raised from the market/investors. But, they usually have fewer analysts. Sell-side firms, on the other hand, have more analysts. Each analyst monitors a specific set of companies or industries and scouts for investors or recommends their clients to those firms and securities.
The objective of the sell-side professionals is to promote and sell securities to their clients to help them raise funds. The primary aim of the buy-side professionals is to invest in the securities to manage or make better use of their available funds.
Sell-side organizations usually have a hierarchical structure, including a managing director, vice president (VP), associate, and analyst. On the other hand, buy-side organizations have a leaner structure that includes a researcher and a portfolio manager.
Usually, the buy-side firms have one department that looks after the fund management. On the other hand, the sell-side firms have several departments (if not all) that work on similar lines.
Sell-side professionals, primarily those with investment banks, have more pressure to work. They generally have longer working hours and are answerable to clients. Buy-side professionals have comparatively less work pressure. It is because they are the ones who have the money they have to make a selection out of several available options.
Analysts and Report
Sell-side analysts give recommendations on whether to buy or sell a particular security. Their research reports are available publicly. Buy-side analysts use the stories and research of the sell-side analysts to decide whether or not to invest in security. They also carry out their research, but their reports are for internal use only and thus, are not available publicly.
The compensation on both the buy and sell-side can vary widely depending on several factors. These factors are job profile, experience, location, and more. Thus, it isn’t easy to compare the compensation between the two accurately.
But, in general, the pay is more for buy-side professionals because of the skill set, experience, and knowledge needed to carry out the work. However, there are significant performance bonuses on both the buy and sell sides.
Following are the roles of sell-side professionals – assist companies in raising capital, help a company carry any significant transaction, assist companies in M&A (mergers and acquisitions), do financial valuation and modeling, promote securities, offer research, and more.
The following are the significant roles of buy-side professionals – managing funds, making an investment decision, searching for investment avenues, identifying and reducing risk, performing research, financial modeling, valuation, etc.
A sell-side professional needs to have the following skills – excellent analytical and quantitative skills, willingness to work long hours, multi-tasking, understanding of financial concepts, ability to analyze financial statements, proficiency in excel and presentation of facts, and valuations convincingly to the prospects.
A buy-side professional needs to have the following skills – understanding market movements, preparing reports, financial modeling, identifying investment opportunities, keeping an eye for potential risks, excel skills, internal summary, convincing investment rationale, etc.
Several career opportunities are available on the sell side, including entry-level opportunities. Some popular career options available under the sell-side are – equity research, corporate banking, investment banking, and sales.
There are comparatively fewer entry-level opportunities on the buy-side. The job profiles are such that professionals progress to the buy-side after working for a few years on the sell-side. Some of the major career options available under the buy-side are – wealth management, portfolio management, hedge fund manager, etc.
How do Buy Side and Sell Side Companies Make Profit?
Like any regular investor, buy-side companies make a profit by buying at a low price and selling at a high price. On the other hand, sell-side firms make money through fees and commissions. Companies use the services of sell-side firms and professionals and, in return, pay them with fees and commission.
Some famous sell-side firms are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Credit Suisse, Citigroup, Bank of America Merrill Lynch (BAML), etc. Leading buy-side firms are BlackRock, UBS, Allianz, Fidelity Investment, Berkshire, etc.
Sell-Side vs. Buy-Side – M&A Context
In the world of M&A, the terms buy-side and sell-side have a completely different meanings. The sell-side M&A means the professionals or investment bankers assisting the company that is the seller (selling itself). On the other hand, buy-side M&A means when the investment bankers are helping the company that is the buyer (acquiring company).