Buy Side

What is the Buy Side?

The Buy Side refers to firms that purchase securities and includes investment managers, pension funds, and hedge funds. The financial institutions of a free-market economy include a segment called the buy-side: firms that purchase investment securities. These include insurance firms, mutual funds, hedge funds, and pension funds, that buy securities for their own accounts or for investors with the goal of generating a return.

Opposite of the buy-side professional is the sell-side. Unlike the buy-side, sell-side efforts do not include making a direct investment. Instead, they assist the investing market with all activities related to the sale of securities to the buy-side, such as underwriting for initial public offerings (IPOs), providing clearing services, and generating research material and analysis.

Jointly, these two sides (buy and sell) make up the main activities of financial markets.

What Does Buy Side Mean?

What is the definition of buy side? Private equity, growth equity, venture capital, insurance firms, hedge funds, mutual funds, pension funds, and institutional and retail investors are all part of the buy side of the financial industry.

Firms on the buy-side seek to create value for their customers (institutional and retail investors) by purchasing underpriced financial assets, expecting that their price will rise so that they can sell them at a higher price for a profit. In this context, they are using sophisticated strategies that can offer them a comparative edge, and will potentially expand their customer base.

Buy-side is a term used in investment firms to refer to advising institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds, and pension funds are the most common types of buy side entities.

In sales and trading, the split between the buy side and sell side should be viewed from the perspective of securities exchange services. The investing community must use those services to trade securities. The “Buy Side” are the buyers of those services; the “Sell Side”, also called “prime brokers”, are the sellers of those services.

Sell side brokerages are registered members of a stock exchange, and are required to be market makers in a given security. Buy side firms usually take speculative positions or make relative value trades. Buy side firms participate in a smaller number of overall transactions, and aim to profit from market movements and accruals rather than through risk management and the bid–offer spread. The 2010 Thomson Reuters Extel/UKSIF Survey shows that buy-side firms are placing more emphasis on sustainability issues in the research and advisory services they receive from brokers.

Typically buy side firms do not provide custody services.

Buy side can also refer to real estate. There is a sell side and a buy side in every transaction. While most real estate technology currently focuses on the sell side, there are a few companies that are developing tools for the buy-side.

Benefits of the Buy-Side

Buy-side investors have many advantages over other traders. They can place large-lot transactions that minimize trading costs. They also have access to a very broad array of internal trading resources that helps them to analyze, identify, and act on investment opportunities in real-time.

While buy-side investors are required to disclose their holdings in a 13F, this information is only available quarterly. Overall, it can generally be advantageous for buy-side analysts and investment firms to keep their investment research and watch lists proprietary. The high level of competition in the buy-side market and the nature of its business typically results in privacy around all trading ideas for the most optimal trading advantages.

Why Does Buy Side Matter?

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.

What’s the Difference between the Buy Side vs Sell Side?

Buy-Side vs Sell Side. The Buy Side refers to firms that purchase 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. Sell-Side firms have far more opportunities for aspiring analysts than Buy-Side firms usually have, largely due to the sales nature of their business.

When talking about investment banking, it is important to know the difference between the buy-side and the sell-side. These two sides make up the full picture, the ins and outs of the financial market, and both are indispensable to each other:

  • Buy-Side – is the side of the financial market that buys and invests large portions of securities for the purpose of money or fund management.
  • Sell-Side – is the other side of the financial market, which deals with the creation, promotion, and selling of traded securities to the public.

Impact of the Buy Side on Individual Investors

The definition of the buy side is not usually considered to include the individual investor. The investments of the individual investor may be impacted by the investment activities of buy side firms, whose massive purchases and sales can impact securities prices. For example, a large buy side purchase can trigger a jump in stock prices, while a sell-off can have the reverse effect.