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Major differences between the buy side vs sell side in the stock market

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The buy side is linked with entities that are involved in making investments. Such entities are individual investors and companies that make investments for future returns. Note that on the buy side, the risk factor is higher as the decision to make an investment is the sole responsibility of the buy side firm or buy side analyst. On the contrary, the sell side is the financial market, which basically deals with the promotion, creation, and selling of securities to the public.

Buy side vs sell side in the stock market

On the sell side of the capital market, professionals represent corporations that are required to raise money by selling the securities. The sell side mostly includes advisory firms, banks, or other firms that can facilitate the selling of securities on behalf of their customers. For instance, a specific corporation that requires to raise funds to upgrade its factory will approach an investment banker and ask him to assist an issue of either equity shares or bonds to fund the factory. Bankers will conduct an analysis with the help of a financial model to understand the investors’ viewpoint about the company’s worth. Next, they will make numerous marketing materials and effectively distribute them among the potential investors. Here is where the buy side comes to play.

The buy side in the capital market is where individual/retail investors and institutional investors hold capital or money to purchase securities. Such securities can be shares, derivatives, bonds, or different products that are issued by the sell side. For instance, suppose an asset management company runs a specific fund that invests in high-worth investors’ funds in the alternative company. The portfolio manager at the company looks for opportunities where they review stocks to buy to put funds, which are believed to be attractive in the industry. One day, the equity sales VP at a major investment bank approaches the portfolio manager to notify them about the upcoming Initial Public Offer (IPO) of the company. The portfolio manager at this point looks for stocks to invest in and purchases the securities, which flows funds from the buy side to the sell side.

Buy side vs sell side role

The main distinction between the buy side and sell side boils down to the role played by them.

Role of the sell side:

  • Advise the corporate clients about major transactions
  • Facilitate raising of capital involving equity and debt
  • Provide guidance on acquisitions and mergers
  • Build relations with corporates
  • Sell and market securities
  • Build liquidity for the listed securities
  • Provide equity research cover of listed companies
  • Assist clients to get in as well as out of their investment positions
  • Conduct financial valuation and modelling

Role of the buy side:

  • Make investment decisions
  • Manage clients’ money
  • Earn a prudent risk-adjusted return on the capital
  • Perform financial valuation and modelling
  • Perform in-house research on the investment opportunities
  • Find investors as well as recruit capital for management
  • Grow the AUM (Assets Under Management)

Conclusion

To sum it up, the sell side, also called prime brokers, is defined as the investment firm that provides corporate entities’ investment services. By charging commission or fees on marketing and selling stocks, bonds, foreign exchange, etc., they make money. Conversely, the buy side is defined as the part of the financial industry that purchases a massive number of financial instruments for the purpose of holding it as an investment either for themselves or for their clients.