At times, investors might have come across the terms “Buy-Side” and/or “Sell-Side”. What do these terms really mean?
The financial markets can be split into two different segments which are made up of specific financial institutions catering to specific target audiences. These segments are coined the buy-side and sell-side firms.
What is a Sell-Side House
Sell-side brokerage firms are financial institutions which provide research products in order to drive the revenue for the company. They help to market for the firm through publishing research reports in order to entice buy-side clients (such as institutional investors) to trade financial products such as stocks and bonds through these brokerage firms. Our local banks, UOB (SGX: U11) , OCBC (SGX: o39) and DBS (SGX: D05) have brokerage arms which serve this purpose.
What is a Buy-Side Firm
Buy-side firms are asset management companies such as a mutual funds, hedge funds, pension funds or other firms whose sole objective is managing their fiduciaries’ assets. The size of these firms is a function of the AUM (termed assets under management) they are managing. An example of a buy-side firm is Value Partners Group Ltd (HKSE: 0806.HK), a 20-year old company with assets under management of roughly US$10.7 billion as at end-Jul 2014.
Are There Differences in Research Produced Between Both Sides?
Sell-side research are written for the purpose of getting clients to make frequent trades. Brokerage firms earn their revenue mainly through commissions; the greater the volume traded, the more money they make. Investors who utilize these reports have to be discerning on the facts and opinions used by the analyst writing the report and understand that reports written could be skewed toward getting clients to trade.
Buy-side research makes use of sell-side research to generate ideas and ultimately to act on the convicted idea. Usually, these asset management companies would conduct their proprietary research in order to determine the best trades to make for their portfolios. Even though these research are not disclosed to the public, it is important for investors to understand that professional fund managers are not necessarily good investors and could produce returns far worse than the general index.
Value in Action
Buy-side versus sell-side. Although it is not critical to one’s investing journey, but it’s always good to understand how the financial markets work.
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.