Sell Side vs Buy Side
The basic split in finance between firms that create and distribute financial products and firms that decide what to buy with investors' money — and why almost every job title in the industry maps to one side or the other.
Almost every institution in finance can be sorted into one of two broad camps, and knowing which camp a firm sits in tells you a lot about how it makes money and who its clients are. The sell side creates, markets, and trades financial products and services — investment banks underwriting a stock offering, broker-dealers executing trades, research analysts publishing coverage. The buy side is everyone using capital to make investment decisions — mutual funds, hedge funds, pension funds, insurance companies. In short: the sell side sells access, execution, and ideas; the buy side buys assets to manage on behalf of its own investors.
The relationship between the two sides is the engine of most of the industry's daily activity. A buy-side asset manager decides it wants to buy a large block of a stock; it calls a sell-side broker to execute the trade, paying a commission or accepting a spread for the service. A sell-side research analyst publishes an opinion on a company; buy-side portfolio managers read it as one input into their own decision, but the actual buy or sell decision — and the accountability for whether it was right — sits with the buy side. Investment banks on the sell side help companies issue new stock or debt; buy-side investors are the ones who actually purchase what gets issued.
The distinction also shapes compensation and incentives in a way that matters for anyone evaluating advice from either side. Sell-side compensation is often tied to transaction volume — more trades executed, more deals underwritten, more assets placed with clients — which creates an incentive to generate activity. Buy-side compensation is usually tied to the performance of the assets actually managed, which creates an incentive to be right rather than busy. Neither incentive structure is inherently corrupting, but recognizing which side is speaking helps explain why a sell-side salesperson's enthusiasm for a product and a buy-side analyst's skepticism about the same product can both be genuine and self-interested at the same time.
Sell side firms create and distribute financial products and services and are generally paid on transaction activity; buy side firms manage pooled investor capital and are generally paid on the performance of what they hold — most jobs, incentives, and conflicts of interest in the industry trace back to which side of this split a firm sits on.
A quick test for either side: if a firm's revenue goes up mainly because more trades or deals happened, it's sell side; if its revenue goes up mainly because the portfolio it manages performed well, it's buy side.
Related concepts
Practice in interviews
Further reading
- Fabozzi, The Handbook of Financial Instruments, ch. 1