Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Buy Side

What it is:

Firms that buy securities and assets for their own or their clients' accounts are said to be on the buy side. Institutional investors like mutual funds, pension funds, hedge funds, private equity funds, trusts, insurance companies and proprietary traders make up the vast majority of the buy side.

How it works (Example):

The buy side makes up one half of the financial market, and the sell side makes up the other. 

Firms on the buy side are money managers that try to create value for their clients by purchasing assets that are underpriced. They often use sophisticated, complicated and highly secretive strategies they believe will give them the edge over other investors.

The sell side is made up of brokerage firms, investment banks and other entities that make buy/sell recommendations, upgrades, downgrades, target prices and research opinions investors can use to make investing decisions.

Why it Matters:

Analysts are employed both on the buy side and the sell side, but they do very different things.

Buy side analysts conduct research for internal use only -- if they derive a formula or strategy that can help their firm beat the market, they keep it from the public.

Sell side analysts conduct research for the public. They provide research to clients so they can make better investing decisions, but a sell side analyst generally has no skin in the game. In fact, it is highly unethical for a sell side analyst to provide opinions on any assets that he/she has a financial interest in.

There is supposed to be a "Chinese Wall" separating buy side analysts and sell side analysts. But this wall is often more porous than in should be. Many investment banks issue sell side research while also maintaining proprietary trading desks where they trade their own money for profit. It is not difficult to imagine that a buy side trader who wants to exit a position at a favorable price would ask a sell side analyst to issue a report to buy the stock.

Always keep an eye out for potential conflicts of interest when reviewing investment research, and seek out the opinion of analysts who meet the highest ethical standards.