Buy Side vs Sell Side: What are they? Why should I care?
When it comes to investment banking, it is important to know the key words “buy-side” and “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 in large portions of securities for the purpose of money or fund management. These include mutual funds, pension funds, hedge funds, private equity, venture capital etc.
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 materials and analysis.
*Investment banks (i.e. Morgan Stanley, Goldman Sachs) belong to sell-side although it has “investment” in its name.
It is important for students to know the differences between sell side and buy side to stand out from your interview
You could be asked “Do you want to work on the sell-side or buy-side in 2 years?” in a top investment bank interview. To answer this question well, you need to have a full understanding of what sell-side and buy-side are, and their roles in the financial market, before you can convince the interviewer that you are committed to either one and particularly this role you are applying for.
Sell-side and buy-side also make money in different ways
- Sell-side firms earn their ways through fees and commissions. Their main goal is to make as many deals as possible. For instance, they engage in foreign exchange markets by buying and selling a substantial volume of currencies, underwriting and managing bond issues bought directly from the US Treasury, dominating the stock market via underwriting stock issuance, taking proprietary positions, and selling to institutional investors.
- Buy-side firms make money from portfolio management with high-alpha ideas. They are the clients for the sell-side firms. They are making money with different portfolio management techniques and investment strategies, including long-short equity, quantitative trading, multi-strategy, long-only, convertible arbitrage, etc. These investment strategies vary among different buy-side funds and the main point is to earn profit from their investments.
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