Understanding the Buy-Side and the Sell-Side
The term "Wall Street" refers to the entire financial industry. But like all streets, Wall Street has two sides: the buy-side, and the sell-side. One side is quiet, the other talks all the time.
Stock Is Product
To an investment banker, stock is a product. That product is created, through an IPO, and then sold in the stock market.
The creators, and "servicers" of stock product are collectively called "the sell-side."
This includes investment bankers who bring the company public, analysts who do research on stocks and make public upgrades and downgrades on the stock, and the market makers who trade stock continually, and profit from the spread between the bid and the ask.
At an investment bank, all these functions are performed at a single institution.
Anyone associated with an institution that does all or part of these functions is said to be "from the sell-side."
Stock is an Investment
Who buys the stock that is created?
The other side of Wall Street, which manages money for a fee, is collectively called the buy-side. This includes a lot of different types of institutions and people such as money managers at mutual funds, pension funds, hedge funds, and institutional firms. Anyone who buys stock, with the intention of later selling it at a profit, is "from the buy-side."
In a general sense, the individual investor is also on the buy-side, but the term generally refers to professional money managers.
The issue is sometimes confused because investment banks also have buy-side parts to them, which manage money for others. To prevent potential abuses, investment banks create so-called "Chinese Walls" to separate their buy-side elements from their sell-side elements.
The Sell-Side Bias
The sell-side, obviously, sells stock.
Like any sales organization, the sell-side tries to get as high a price as the market will pay. And like any good sales organizations, those on the sell-side "stand behind" their product. However, unlike some other industries, they don't offer a money back guarantee.
But the sell-side does service and support its product. It does this with analysis and ratings of the stock it has sold.
This is where the sell-side sometimes gets criticized as having a bias towards "pushing" stock. However, this is where the stock industry differs from other industries. The sell-side has no real control over how well a company performs, which is ultimately reflected in the stock price.
Nevertheless, sell-side analysts try to present as positive a picture as possible for stocks they have brought to market, through analysis and research. The cynical viewpoint is that this picture is created solely to drive up the price.
What the sell-side really tries to do, however, is envision the future, just as we all do, and bring to market new stocks, as well as support existing stocks, that will benefit from that vision.
Ultimately, the sell-side bias is countered by a desire for a good reputation. A firm that continually pushes low quality companies is quickly known as such. But a firm whose sales pitch turns out to be accurate generates loyalty from the buy-side customers.
In the ideal world, every stock that an investment bank brings public becomes a great company. The analysts covering the stock predict a great future, and it happens. Everyone wins in that scenario.
The Buy-Side Silence
Although the buy-side receives a lot of sell-side research and analysis, it doesn't bank on it as a sole source.
The buy-side does its own research and forms its own vision of the future. But it doesn't share it with the world.
In fact, if the buy-side stumbles on a formula, vision, or approach that works, it keeps it secret. Wouldn't you do the same?
Upgrades, downgrades, target prices, and opinions all come from the sell-side. The buy-side keeps its opinions to itself.
But make no mistake. There are more analysts in the mutual fund industry alone than there are at investment banks. You just don't ever hear what the buy-side research uncovers.
Where They Meet
The buy-side, obviously, must trade stocks. Generally, it executes trades at the large sell-side houses.
Why? Because sell-side houses can execute large block trades. If you are a money manager, you can't trade a 100,000 block on an online brokerage system. You need to get a middleman, the sell-side broker, to prearrange a trade for you. When a 100,000-share block crosses the wire, it is the result of several phone calls, maybe hours of phone calls, to prearrange the trade between two or more parties.
The buy-side needs the sell-side for trades. The sell-side needs the buy-side to take product. Both sides together make Wall Street.
Briefing.com's Unique Role
Briefing.com is firmly planted between the buy-side and the sell-side.
We do original research and offer investment analysis and opinions. But Briefing.com does not manage money, nor do we accept fees or any payments-in-kind from companies in exchange for coverage. When we write positively about a stock, we have no position to defend or support.
Our research and stock analysis are solely designed to provide you, our only customer, with investment ideas, from which you can form your own decisions.
Like the buy-side and the sell-side, we aren't always right. But unlike both sides of Wall Street, we always have your interests as our top priority, in the hopes that you will become, and remain, Briefing.com readers.
