What is Buy-Side vs. Sell-Side?
You’ll often hear finance professionals describe their role as being either on the “sell side” or on the “buy side.” As is the case with a lot of finance jargon, what this exactly means depends on the context.
- Sell side refers primarily to the investment banking industry. It refers to a key function of the investment bank — namely to help companies raise debt and equity capital and then sell those securities to investors such as mutual funds, hedge funds, insurance companies, endowments and pension funds.
- Buy side naturally refers to those institutional investors. They are the investors who buy the securities.
A related function by the sell side is to facilitate buying and selling between investors of securities already trading on the secondary market.
Sell Side: Investment Banking Industry and Firms
While we describe the various functions of the investment bank here, we can briefly outline its capital raising and secondary markets roles:
- Primary capital markets: Investment banks work with companies to help them raise debt and equity capital. Those bonds and stocks are sold directly to institutional investors and are arranged through the investment bank’s equity capital markets (ECM) and examples of roadshows) and distribute the securities to institutional clients. teams, who, along with the investment bank’s sales force, market via roadshows (see
- Secondary capital markets: In addition to helping companies raise capital, the investment bank’s sales & trading arm facilitates and executes trades on behalf of institutional investors in the secondary markets, where the bank matches up institutional buyers and sellers.
Sell Side: Functions and Roles
The investment bank has several key functions that make its role as a seller of corporate securities to investors possible. Those roles include:
- Investment banking (M&A and corporate finance): The investment banker is the primary relationship manager interfacing with corporations. The banker’s role is to probe and understand its corporate clients’ capital raising needs and to identify opportunities for the bank to win business.
- Equity capital markets: Once the investment banker has established that a client is considering raising equity capital, ECM begins its work. ECM’s job is to usher corporations through the process. For IPOs, for example, the ECM teams are the key hub in determining structure, pricing and reconciling the clients’ objectives with current conditions in the capital markets.
- Sales and trading: Once a decision to raise capital is made, the sales & trading floor begins its job to contact investors and actually sell the securities. The sales & trading function not only works on helping initial debt and equity offerings get subscribed, they are central to the ivnestment bank’s intermediary function in secondary capital markets, buying and selling already trading securities on behalf of clients (and sometimes for the bank’s own account “prop trading”).
- Equity research: Equity research analysts are also known as sell-side research analysts (in contrast to buy side research analysts). The sell side research analyst supports the capital raising process as well as sales and trading in general by providing ratings and other hopefully value-adding insights on the firms they cover. These insights are communicated directly through the investment bank’s sales force and through equity research reports. While sell side equity research is supposed to be objective and separated from the investment bank’s capital raising activities, questions about the function’s inherent conflicts of interest were brought to the fore during the late ’90s tech bubble and still linger today.
Buy Side: Institutional Investors
The buy side broadly refers to money managers – also called institutional investors. They raise money from investors and invest that money across various asset classes using a variety of different trading strategies.
Whose Money Does the Buy Side Invest?
Before getting into the specific types of institutional investors, let’s establish whose money these institutional investors are playing with. As of 2014, there were $227 trillion in global assets (cash, equity, debt, etc) owned by investors.
- Nearly half of that ($112 trillion) is owned by high net worth, affluent individuals and family offices.
- The rest is owned by banks ($50.6 trillion), pension funds ($33.9 trillion) and insurance companies ($24.1 trillion).
- The remainder ($1.4 trillion) is owned by endowments and other foundations.
So how are these assets invested?
- 76% of assets are invested directly by owners 1.
- The remaining 24% of assets is outsourced to third part managers that act on behalf of the owners as fiduciaries. These money managers constitute the buy side.