If you have ever spoken with a finance professional you’ve probably heard them talk about the “buy-side” and the “sell-side”. In this post, I will be breaking down each of these categories into the three main areas you would have likely heard of as an undergraduate.
The Buy Side
Asset Management is pretty much what it sounds like; a client gives money to an asset manager who purchases investment products such as stocks, bonds and derivatives on behalf of their client with the goal of growing their capital. Different asset managers have different investment styles, which are typically classified in three ways:
- Types of security – i.e. Stocks vs. Bonds
- Risk characteristics of the investments – i.e. Growth vs. Value stocks / Treasury vs. Junk bonds
- The manner in which the portfolio is constructed – i.e. Active vs. Passive funds
A Hedge Fund is a more exclusive investment partnership seeking to maximise investor returns and eliminate risk. It’s the union of a professional fund manager, who will implement the fund’s strategy, and the investors, who contribute funding for the assets. A hedge fund can invest in basically anything and is only open to accredited investors, who must meet certain net worth requirements.
Private Equity firms are typically organised as limited partnerships and put their own capital at risk by going out and actually buying companies. Private equity firms are known for their extensive use of debt financing to purchase companies, which they restructure and attempt to resell for a higher value. Debt financing reduces corporate taxation burdens and is one of the principal ways in which private equity firms make business more profitable for investors.
The Sell Side
Investment Banking Division
The IBD is the traditional arm of an investment bank. Their clients are often seeking advice and support on transactions such as mergers and acquisitions (M&A), initial public offering (IPO) and raising capital through debt or equity (DCM/ECM). The IBD can be thought of primarily as a facilitator of financial transactions, for which they charge fees to make money.
Sales and Trading
Sales professionals develop relationships with clients, provide them with investment advice and take buy/sell orders which they pass on to traders, usually making commission. The traders execute these orders, structure new products or buy/sell the bank’s own inventory of securities to the client. Each trade is usually profitable by an amount called the bid-ask spread.
Research specialists focus on analysing companies, markets and products. Their research is then published to benefit clients and the other groups in the bank. For example, their insights and conclusions into companies and markets are often used by the sales team when pitching new ideas to clients. Due to regulation introduced by MiFID II in January 2018, buy side firms must now make explicit payments for research to demonstrate they are not being induced to trade, thus making these services a new and distinct revenue stream.
Hopefully this has given you some insight in to which area of finance might be for you and I’d encourage you to do some further reading if there’s a division which appeals to you; Investopedia is great for definitions and wallstreetoasis has some excellent forums.
Look out for my next post where I’ll be breaking down the functions of the “Big 4” and if you have any questions, please feel free to message me on LinkedIn!
Jamie is an incoming third year Economics student at the University of York and President of the Investment & Finance society. This summer he interned with Deloitte in their Restructuring team and will be returning in 2019 as a Restructuring Associate.