Buy Side vs Sell Side
You can learn about the structure of both sides' firms, their work experience, and some famous firms on each side so you can apply for your future job.
What is The Buy-Side vs. Sell-Side?
The sell-side in the financial industry refers to the party in charge of designing and selling financial products, assisting companies in going public and issuing bonds, and other intermediary activities, such as investment banks.
For the buy-side, some common types of firms are hedge funds, mutual funds, and other financial institutions that receive profits through investment.
For finance students, you may hear people say, “Should I go to the buy-side or sell-side after graduation?” I heard this question countless times during my college life. Back then, the question that was always in my heart was: “What do these terms mean?”
If you have the same question as me, please continue reading.
In this article, we will introduce the history and development of both sides, the definitions of the buy-side and the sell-side, the structure of both sides’ firms, work experience, and some famous firms on each side so you can apply for your future job!
The financial industry is always competitive, so it is essential to start planning your career path before you graduate.
Choosing a side is one critical decision before applying for a job. The financial industry is fun, too. You always have a chance to encounter new challenges and build your skills.
Key Takeaways
- Buy-side firms are institutions that invest money on behalf of clients, such as asset managers, hedge funds, pension funds, and private equity firms.
- Sell-side firms are institutions that facilitate securities transactions and provide various financial services to clients, such as investment banks, broker-dealers, and market makers.
- Buy-side firms focus on investing capital to generate returns for their clients or shareholders. They conduct research, analysis, and due diligence to identify investment opportunities and manage portfolios.
- Sell-side firms primarily serve issuers of securities, corporations, governments, and other entities seeking to raise capital, issue debt or equity, execute transactions, or access financial markets.
Buy-Side vs. Sell-Side: History
In finance, what do both sides mean? Simply put, it means people who are buying and selling securities.
The buyer is the entity or financial institution that purchases the security. This typically includes public funds, private funds, insurance companies' investment departments, and other entities such as asset management firms.
Entities that sell securities, primarily through brokerages and independent research institutions, are sellers. Sell-side firms have teams for stock analysis and research and provide advice on a company's fundamentals.
The important positions of buyers and sellers emerged in the 1970s in the United States.
Barton Biggs, the author of "Hedge Funds" and a well-known Morgan Stanley strategist, formed a super-luxury analyst team for the first time in the company. Due to its strong analytical capabilities and market insight, this team created exceptional investment value.
Then came the 1980s' longest bull run in the US stock market. Both sell-side research institutes and buy-side financial organizations benefited from this bull market.
Thanks to their research staff, Morgan Stanley invested in many high-tech businesses in the 1990s.
The research institute has once again been identified as a hot field. Naturally, therefore, the sell-side research institute's overall status improved.
In terms of the business model, the sell-side gives counsel and assistance, while the buy-side handles the transaction directly. Buyers and sellers conduct research differently due to different assessment systems.
What is the Buy-Side?
As described above, buy-side is a common term in the financial industry; it refers to financial institutions that purchase securities, equity, and other financial products to increase the rate of return on investments and earn a commission.
Typical categories of firms on the buy side are:
- Funds
- Mutual funds
- Hedge funds
- Pension funds
- Insurance companies
- Asset management
- Private Equity
Warren Buffett and George Soros, well-known investors, represent the buy side. These businesses collect money from investors and invest it on behalf of clients from sell-side entities and aim to generate a return.
Buy-side firms generally charge management fees and a commission on profits. This is how they make money in the financial market, relying on their investment skills.
I'm sure you can see what these companies have in common: they all have a lot of money.
Mutual and hedge funds raise money from various investors; pension insurance companies have a lot of annual income by selling insurance, etc.
Therefore, these companies will invest their money and buy financial products from the sell side.
What is the Sell-Side?
Generally speaking, the sell-side usually refers to the investment banking department, which corresponds to the IBD (Investment Banking Division). However, nowadays, the investment bank is no longer a single department but an entity with numerous departments.
So, what is the function of an IBD? Their business includes initial public offerings (IPOs), mergers and acquisitions (M&A), stock underwriting, debt issuance, etc.
How do they make money? The sell-side usually relies on sales commissions based on stock and bond underwriting and service fees to assist an IPO, merger, etc.
Nowadays, most investment banks have a Sales and trading department (S&T) that acts as a market maker. So, how does this department earn income? The most common strategy is to earn a bid-ask spread.
This department's employees sit in front of the computer all year round to analyze the stock market's dynamics and trends. They aim to find suitable buying and selling points and build practical strategies to earn the bid-ask spread.
In other words, the seller's job is to keep the financial sector running well, then operate as a middleman and receive commissions.
We can also conclude that the consulting industry is on the sell side, and consultants benefit by selling their intelligence, such as consulting solutions, operations management, and advice.
Buy-side Vs. Sell-Side: Firm Structure
The differences between the firm structure under the buy and sell-side are as follows.
Buy-Side
The structure of the buy-side is relatively simple. 4 or 5 professionals may manage billions of dollars worth of assets. How about their department? Some buy-side firms like to outsource their accounting and human resources departments.,
Therefore, the size of a buy-side firm will not be too large compared to the size of an investment bank.
Commonly, there are only about 100 employees within a private equity fund, equivalent to the number of workers in only one department of an investment bank. But, even then, private equity (PE) firms of this size are already quite large.
Sell-Side
Let’s take the investment bank as an example for the sell-side. As we mentioned before, the IB is a complex machine with two essential departments: IBD and S&T.
However, to maintain the operation of these two departments, many more departments, such as risk control, legal compliance, operations, etc., are usually required.
Buy-side Vs. Sell-Side: Career Path
The following will outline the differences or similarities in the career paths of both sides.
Sell-Side
On this side, employees generally climb slowly along the career ladder. Nevertheless, the job title is essential! It represents your salary, benefits, and your right to speak.
In IBD, the general career promotion path is as follows:
- Analyst
- Associate
- VP (Vice President)
- ED (Executive Director)
- MD (Managing Director)
- Partner
Some companies will set up many other levels, such as Senior Vice President (SVP), Associate Vice President (AVP), Analyst I, Analyst II, Officer, and so on.
Buy-Side
The career promotion on this side is very simple, usually being:
- Analyst/Associate
- Manager
- Partner
Do you feel you prefer to work there when you see the corporate structure of the buy-side? It is much harder to work on the buy side than the sell side (even though we all know that working on the sell side is hard enough).
The main reasons for this imbalance are:
1. Limited supply: The buy-side team is small, so there is less demand for recruiting.
2. Result-oriented: Individuals who work on the buy side normally invest with clients' money. Therefore, they are 100% responsible for the investment results.
3. Although the company's size is relatively small, the workload won't be lighter. Therefore, every employee (especially juniors) must have comprehensive professional knowledge and an in-depth understanding of many industries. As a result, it requires greater demands on individual ability.
Buy-Side Vs. Sell-Side: Working Experience
The following study outlines the differences between the two sides in the area of working experience.
Sell-Side
The most important aspect of this side is that they must sell their products and services to profit.
First and foremost, you must promote your financial product and encourage clients to purchase it. In general, numerous companies compete for the same customer. Therefore, you must demonstrate your exceptional skills to win over clients.
That's why recruiters on the sell side pay close attention to candidates' backgrounds. So why do JPMorgan Chase and Goldman Sachs want to hire graduates from prestigious universities? Is it because no one else is capable of doing the job? The answer is an emphatic NO!!
There is no such thing as a high threshold regarding job content. Aside from the fact that people with solid backgrounds are often smarter and easier to work with, another essential factor is to meet customers' high expectations.
As a result, anyone interested in working for an investment bank, consulting institution, or other sell-side firms should have a high-quality CV to catch HR's attention.
As previously mentioned, the title of the sell-side position is crucial. Your salary and status will rise due to a promotion in your title. Due to this, personnel of investment banks, equity research, and consulting firms are frequently seen in suits, well-spoken, and always prepared for various complex challenges.
Employees are frequently asked to work extra hours to meet clients' expectations. As a result, it's usual to work more than 80 hours per week throughout your first three years on the job.
Buy-Side
On the other hand, people who operate on this side simply have to worry about the value they create and the results of their investments. As a result, the title is unimportant, the workload will be substantially lower, and the firm will likely not have a dress code.
Employees who don't pay attention to their appearance are more likely to gain investors' trust because they will believe you have not squandered time where it should not have been wasted.
Finally, compared to the sell-side (especially IBD), buy-side positions allow for a better work-life balance. This is one of the reasons many people prefer to work with buy-side organizations.
Even though working in investment banking is difficult, the high compensation attracts many graduates yearly. WSO offers outstanding courses that might assist you in achieving your goals.
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