People say a lot about the Wall Street analyst, and the narrative may lead one to think that all the Wall Street analysts are a homogenous mix of traders. But that is as far from the truth as it can be. On the ground, there are striking differences in the roles that the analysts have. The buy-side and the sell-side traders, for instance, spend much of their day researching assets and companies, but their jobs differ a great deal on almost every other aspect.
Sell side traders include firms that sell, issue, or trade in securities. These traders work in advisory firms, corporates, and investment banks. On the other hand, buy side traders purchase securities and are usually interested in investment portfolios, hedge funds, and pension funds.
Apart from the above-mentioned key difference that stems from the definition itself, there are a few other fundamental differences in the job. Keep on reading this article to learn how the two jobs differ.
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The Two Sides of Investment Banking: Buy-Side and Sell-Side
Though vastly different in their job profiles, both buy-side and sell-side traders help keep the financial market functioning. One cannot exist without the other. However, certain key differences help distinguish between the two, and these differences are also vital in keeping the balance in the financial market.
Who Is a Buy-Side Trader?
A buy-side trader, as the name suggests, buys securities. They invest in the financial market by purchasing large portions of financial assets to retain them in their fund management portfolio, and this is how buy-side traders help build their wealth and funds. The purchase scale varies a great deal and will depend on the trader and the targets assigned to them, but their primary function remains the same – to buy.
The buy-side trader has also gained a lot of notoriety because of their extravagant lifestyle. The book, The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess is a very candid exploration of the Wall Street culture.
Who Is a Sell-Side Trader?
On the other end of the spectrum, sell-side traders help keep balance in the financial market by doing just the opposite of what the buy-side traders have done. They sell securities. Their main trade consists of the creation and promotion of traded securities. Sell-side traders from different corporations and investment banks invest their skill in selling these securities to the general public.
8 Key Differences Between Sell Side Traders and Buy Side Traders
Sell Side and Buy Side Traders Perform Different Functions
The main purpose of sell-side traders is to facilitate the selling of financial assets such as securities on behalf of their clients. For instance, if a corporation plans to build a new manufacturing unit, it will need to raise the money either internally or by seeking investment. If they choose the latter, they will need to contact an investment banker to help raise funds.
In the above example, the investment banker will have to issue either debt or equity to finance the new manufacturing unit for the company. By selling equity, the investment banking firm will raise the money that the corporation needs.
Using the same example as illustrated above, you can also see how buy-side trading works. Once the investment banker prepares the marketing material that they intend to distribute to potential investors, the buy-side traders, who are the ones with the money and capital, will step into the picture.
There are asset management firms that handle high net worth clients’ wealth. The buy-side traders will analyze the securities that are up for sale – these securities could be anything ranging from bonds, common and preferred shares, and derivatives. Buy-side traders look at the opportunity presented in the investment banker’s marketing material and investigate the securities offered.
If the buy-side trader believes that there is a chance of accruing a good return on investment, they buy the securities, and this is how the money flows from the buy-side to the sell-side.
Sell Side Traders Advice While Buy Side Traders Manage Their Clients’ Wealth
The day to day responsibilities of the sell-side traders and the buy-side traders also vary considerably. While the sell-side traders are more inclined to advise corporates on any major transactions, the buy-side traders directly manage their clients’ money.
Sell Side Traders Raise Capital, Whereas, Buy Side Traders Make Investments
While the sell-side trader focuses on raising capital for its clients, the buy-side trader is more inclined to invest. Sell-side issues securities and buy-side look out for their clients’ best interest by checking for the best return on investment on their purchases.
The sell-side merely facilitates the sale of securities for raising capital, but the buy-side traders have to actively research and make investment decisions for their clients. The latter has to decide whether he can buy, sell, or hold the capital.
Sell Side Traders Are Involved In Marketing Promotions, But Buy Side Traders Are Not
Unlike buy-side traders, the ones on the sell-side also get involved in various marketing projects for their securities. They have to find new ways to rope in investors and convince them that their money’s worth investing in the securities that the sell-side traders have for them.
Buy-side traders do not have to look at the marketing aspect of their securities at all. The entire onus of educating and piquing the interest on the buy-side lies with the sell-side traders alone.
Sell Side Traders Have A Wider Margin of Error Than Buy Side Traders
Since sell-side traders do not have to evaluate the securities by running an analysis on them nor speculate on the return on investments for the securities, they have a very wide margin of error. Unfortunately, the same luxury is not enjoyed by the traders on the buy-side as they are responsible for each of their decisions.
Buy-side traders have to research each of the investment opportunities presented with, do a valuation of the securities, and sometimes even have to raise the capital to invest in the securities. Buy-side traders also need to manage the funds after investing.
Buy Side Traders Need to Grow Assets Under Management, Buy Sell Side Traders Have No Such Obligation
The sell-side trader’s responsibility ends with procuring the funds for its clients, whereas the buy-side trader has a more long-term commitment. After purchasing securities, buy-side traders also need to ensure that their assets are growing. They not only become the custodians of large value assets, but they also need to ensure that the asset is growing in value to have an assured high return on their investments.
Sell Side Traders Have A Different Career Path Than Buy Side Traders
The career options available for the two kinds of traders are also quite different. If you are on the buy-side, your career will revolve more around portfolio management. You will deal in private equity, hedge funds, and venture capital and be assigned a function that deals with wealth management.
The career options largely include investment banking, equity research and marketing, and sales trading on the sell-side. They help create liquidity for securities and help clients with raising capital for different projects and endeavors.
Buy Side Traders And Sell Side Traders Rely On Similar But Different Skills
On the skill-set front and the buy-side, as well as the sell-side traders, have a few research and report generation, presentation skills for pitching to investors, and managing client relationships.
That being said, buy-side traders rely mostly on expert analysis skills, excel proficiency, industry research, report generation, and raising capital. They also need to ensure that they can achieve a high return on their investments as well. On the flip side, sell-side traders heavily rely on their communication and presentation skills.
This video discusses in further detail the difference between buy-side and sell-side traders at hedge funds and banks:
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Conclusion
Hopefully, the differences mentioned in this article have helped you understand what sets the sell-side traders and the buy-side traders apart. It is also interesting to note that many different rules and regulations apply to them and the differences highlighted above.
Buy-side traders enjoy relatively less restrictive rules when it comes to their share ownership. Similarly, sell-side traders also have a wider margin of error as they do not need to worry about being wrong in their trading as often as buy-side traders.
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