Buy Side vs Sell Side – What Does It Actually Mean?

From one perspective, the professional finance sector is basically broken down into two sides: the buy side and the sell side. Understanding what these terms are and the very different goals of the buy side vs sell side will help you better understand the reports you read and improve your ability to make sound investing decisions.

What Is Buy Side?

This section will be the easiest to understand because the buy side is where anyone from hedge funds to regular investors stand.

The buy side represents the side of finance that purchases stocks, bonds, and any other financial instruments for the purpose of investing or money management.

How Does Buy Side Work?

Essentially, the buy side represents any entity that engages in the financial markets for the purposes of investment.

It’s not a case of buy side firms only ever buying securities and never selling them.

They buy and sell securities like any ordinary investor would, except on a much bigger scale.

They’re unique in the fact that they don’t market investment opportunities nor help companies raise finance by marketing their businesses.

So, as an example, when a hedge fund is shorting an asset, they still are a part of the buy side. Even though they’re “selling” an asset.

You won’t tend to find a hedge fund that’s pitching an M&A opportunity or one that’s implementing the M&A, for instance.

That’s much more in line with what a sell side firm might do.

More on that in a bit.

For now, the only thing your eally need to take away is that the buy side works directly with one of several sell side participants to invest pools of money large and small.

Either for themselves, or for the clients whose money they manage.

Examples include everything from pension funds to mutual funds, venture capital, private equity, and beyond.

What Does a Buy Side Analyst Do?

Buy side analysts are generally not very open about their market data, so the reports you see on the news won’t typically be from a buy side analyst.

Imagine how an investment firm or a hedge fund works.

They only get paid when they bring in profits.

Naturally then, the methods they use to bring in those profits are typically very tightly kept secrets.

You should always be a bit wary of what you see or read in financial news.

But you should be especially wary if you see an analyst you can identify as being on the buy side who is giving out free information.

This goes back to an age-old argument about the paradox of market efficiency. If markets are efficient, and everyone believes they are, then over the long term, markets will become inefficient.

In a similar light, if a buy side analyst openly shares some strategy that works, and everyone starts to adopt it, then that strategy will no longer yield alpha.

If you’d like to learn more about why this is the case, it’s worth learning about the investment fundamentals of price, risk, and return.

The point for now, is that if a buy side analyst openly shares their strategy, then that strategy would fail to beat the market portfolio.

They would fail to bring in the type of profits they set out to bring.

Thus, it would simply not be in any buy side analyst’s interest to openly share their investment strategies.

Indeed, this is something we highlight in many of our investing courses but especially in our course on Data-Driven Investing with Excel, and our Data-Driven Investing with Python course.

Our courses teach you how to create investment strategies that have the potential to generate alpha.

They also teach you why those strategies work, backed by statistical evidence instead of “mumbo jumbo mind-mastery” that the internet is sadly (but entertainingly) flooded with.

The key takeaway for now though, is that buy side analysts search for and help implement investment strategies that have the potential to earn alpha.

What Is Sell Side?

Sell side broadly represents any organisation engaged in creating, marketing, distributing, and selling securities to the buy side.

This is generally the realm of investment banking.

An Investment Bank will work with large corporations to assist in the process of selling new shares of stocks and bonds to investors.

Investors in this context might include financial institutions like mutual funds, pension funds, etc (the buy side).

It might also include individual investors although this would typically only be for ultra high net worth individuals.

Retail investors and other investors end up buying from brokers or other buy side financial institutions.

How Does Sell Side Work?

The sell side works on a completely different level and involves a few different levels.

The first leg of the sell side is the corporations who wish to raise capital by selling stock or bonds.

While technically not an official part of the sell side, corporations are critical to the whole process.

Investment banking and asset management and advisory firms will offer various services to corporations depending on the needs of the company, whether the company is publicly traded or not, and other details.

Once the firm is officially engaged by the corporation, the bank then works with exchanges or other financial firms to market and distribute the new shares as needed.

Since most retail investors can’t buy their stock directly from investment banks, there are brokers that facilitate the distribution of shares to the buy side.

One might confuse larger investment firms as being part of the sell side since you deposit your funds to buy and sell stocks just like a broker. But large investment firms work with their own brokers to obtain shares and other assets.

If you have dreams of working at a sell side institution, it’s worth mentioning that the structure of the company usually has a very rigid hierarchy.

Much like any sales-heavy organisation, such as a legal firm or large public company, people have the potential to make more the higher they move up, but the lifestyle is demanding and difficult.

You can expect to forget about having any real social life for a while as a sell side investment banker. Or choose between a social life and good sleep. We’d always opt for the latter, truth be told.

What Does A Sell Side Analyst Do?

Sell side analysts are often the ones responsible for the announcements on financial news.

They are generally responsible for creating reports on several companies that get distributed to clients as market intelligence.

These reports then make it onto financial news media soon thereafter as a byproduct.

This research is part of the service offered by members of the sell side. And it would generally be categorised as marketing since it gathers interest in particular companies.

Research analysts may put out more reports than normal for companies who have engaged their services to sell assets to the public. But there are usually scheduled reports that go out.

Sell side analysts will have markers like price points and financial estimates that point to the overall health of a company. But note that much of the information available to them is also available to the public.

This is, of course, different during an IPO where a sell side equity research analyst may have access to private information (which will later become public).

Understanding the data that sell side analysts use can actually help as well, but it takes study and practice to be able to turn that data into investment decisions.

Is Goldman Sachs Buy Side or Sell Side?

Many people think that Goldman Sachs is solely a member of the sell side, however this isn’t true. Goldman Sachs does, indeed, deal primarily with sell side service and liquidity operations for the market. But it is a very large bank that has many parts.

Goldman Sachs includes Goldman Sachs Asset Management, which is a buy side firm group that usually caters to high-net-worth (HNW) and even ultra-high-net-worth individuals.

Many of the large institutional banks you’ve heard of – be that Morgan Stanley, JP Morgan, or others – will offer services to both the buy side and the sell side.

While it might seem willfully confusing at first, you will be able to quickly tell the difference between Goldman Sachs and Goldman Sachs Asset Management, for example, once you understand the difference between the buy side and the sell side.

Is Buy Side vs Sell Side Different For M&A?

The world of mergers and acquisitions (M&A) is mostly nestled deep within the sell side.

However, be forewarned that, should you stumble across information regarding specifics of a merger, the deal itself will refer to one party as the buy side and one party as the sell side.

Broadly speaking though, M&A has little to do with the buy side as far as actually implementing a merger or acquisition goes.

The due diligence, paperwork, pitching, etc, is – for the most part – done by the sell side.

What’s Next – Buy Side vs Sell Side

Hopefully, you now know the key differences between buy side vs sell side.

As a quick summary, the buy side represents any entity that engages in the financial markets for the purpose of investing money.

This would include retail investors, asset managers, hedge funds, or investment firms.

By contrast, the sell side represents the organisations that make, market, distribute, and sell financial assets to the public on behalf of corporations and similar entities.

Corporations work with the sell side for the purpose of generating capital in the form of issuing new stock or bonds.

These are relatively simple concepts, but the important aspect is that both sides have analysts, and they have different objectives.

Understanding the difference can help you make better investment decisions and gather the correct data.