dusted / 28 February
Research analyst: buy-side vs sell-side
In the world of finance and investment, there are two broad categories companies tend to fit into: sell-side and buy-side. Understanding the difference between these two is critical as a research analyst because it fundamentally alters the key objective of their analysis.
What are sell-side and buy-side?
Sell-side companies tend to sell advisory or financial services for commision or a fixed fee. They include industries like investment banking, research, or sales and trading. Their main objective is to get as much commission as possible, meaning many deals that are as big as possible. They’re known as ‘sell-side’ because their business is selling ideas and financial advice directly to investors.
Buy-side is different. Buy-side firms take investments from various sources, be them mutual funds, pension funds, trusts, or a company or charitable organisation, then provide research and recommendations to benefit the fund manager (as opposed to all the individual investors). The returns are then shared out to the investors, although they do not have access to the buy/sell strategy used by the analyst.
While the specifics of buy-side analysts’ strategy has to stay under wraps (due to large market movements affecting the price of a security), the general principle is the same. They buy assets at a low price and sell them for a high price.
What is the difference between the two?
Sell-side analysts are the analysts that you would typically hear about when you watch financial news programs. When they talk about “analysts” they are mostly referring to sell-side analysts who provide unbiased opinions based on research on particular securities. Compared to buy-side, sell-side analysts tend to focus on less broad industries. For instance, a buy-side analyst might specialise in the technology industry, while a sell-side analyst would focus on specific sectors, such as software.
There’s also a slightly different skill set required for sell-side, with more emphasis on salesmanship. While both sell-side and buy-side require skills in researching industries, financial modelling, Excel, and research report generation, sell-side analysts also need to be knowledgeable about pitchbook presentations, client relationship management, winning new business, and selling and closing deals.
Meanwhile, a buy-side analyst’s job is a high-pressure one because their decisions define an institution’s return on investment. They need observation skills, research experience, and industry know-how to ensure their decisions are always correct. Often, it’s actually more accurate to say they make sure they don’t make mistakes than ensure they are always correct, as many analysts work with the objective of figuring out what could go wrong with an idea, more than what could go right.
Buy-side analysts use data that they source either from their own research or sell-side analysts to gain a realistic, objective perspective of the market. The day-to-day responsibilities include collecting information from every source, such as news feeds, building models, and generally deepening their understanding of their specific area of responsibility. Anything that can help an analyst make the best, most informed stock/investment recommendations, it’s their job to know it.
There are a lot of similarities between buy-side and sell-side, both of whom have to stay well-informed through perseverance and hard work. But while sell-side analysts tend to focus on collecting data, buy-side analysts spend more of their time scrutinising the sell-side analytics for the most useful intelligence (although the best buy-side analysts access third-party data and source their own information).
Which is right for you?
There is no right answer for which type of analyst is better – they both appeal to different skill sets. However, a noticeable trend over the last 12-18 months has been the number of sell-side analyst moving to buy-side. This can be attributed to the increased uncertainty in investment banks and sell-side research firms due to MiFID II. As a result, a large number of sell-side analyst have been interested in making the transition to the buy side. If you are currently working in sell-side and wish to move to buy-side, be sure your expectations are realistic. For instance, you won’t necessarily receive an immediate bump in pay; buy-side analysts tend to earn less, although earnings usually increase more rapidly.
If you think of yourself as a salesperson or marketer, then sell-side is more appropriate for you. However, if your ambition is to be a great stock picker, then a buy-side position should be right up your alley. Consider your skill sets, figure out where your job satisfaction comes from, and then you should be able to work out what works best for you
If you’d like to know more about buy-side or sell-side analytics jobs, feel free to get in touch via our contact page. The next rung on your career ladder could be closer than you think.