What is the buy side?
The financial institutions of a Free market include a segment called the buy side: companies that buy investment securities. These include insurance companies, mutual fund, hedge fundsand pension fundswho buy securities for their own account or for investors with the aim of generating a return.
Opposite the purchasing professional is the sell side. Unlike the buy side, the sell side efforts do not include making a direct investment. Instead, they assist the investor market in all activities related to the sale of securities to the buy-side, such as subscription for initial public offerings (IPO), providing clearing services and the production of research and analytical materials.
Together, these two components (buying and selling) constitute the main activities of the financial markets.
Key points to remember
- The buy-side is a segment of the financial markets made up of investment institutions that buy securities for money management purposes.
- The sell side is the opposite of the buy side, providing only investment recommendations and services to facilitate the purchase of securities by the buy side.
- A company involved in buying activities will purchase stocks, bonds, and other financial products based on the needs and strategy of their company’s or client’s portfolio.
- Common purchasing institutions include hedge funds, pension funds, and mutual funds.
Understanding the buy side
A company involved in buying activities will purchase stocks, bonds, and other financial products based on the needs and strategy of their company’s or client’s portfolio. Purchasing activity takes place in many contexts not limited to the financial institutions mentioned above. They also include trusts, equity fundsand high net worth individuals.
The point of buy-side investing is to create value for a company’s customers. To do this, they identify and buy undervalued assets that they believe will appreciate over time. As the buy-side consists of buying large blocks of stock market securities, the most prestigious companies often have significant market power. These market titans are also closely watched by investors and the media.
The value of BlackRock assets under management (AUM) as of December 31, 2020. BlackRock is the world’s largest investment manager by assets.
Companies like BlackRock and Vanguard can significantly influence market prices when they invest heavily in unique names. However, these investments are generally not disclosed in real time and can look a bit like ghosts to market traders. The Securities and Exchange Commission (SECOND) deposit 13F requires public disclosure by buy-side managers of all stakes bought and sold each quarter.
Following the buy-side investment
The 13F Quarterly Filing is a recommended source for all types of investors to follow some of the best investments and investors in the market. warren buffet and his company, Berkshire Hathaway (BRK.A/B), are examples of how buy-side investors can guide investment approaches.
In addition, many investors will review the holdings of these larger investors and changes in those holdings, especially securities in return for completing a transaction themselves. This data is available through several online resources.
Buy-side investors have many advantages over other traders. They can place largeplot transactions that minimize trading costs. They also have access to a very wide range of internal business resources that help them analyze, identify and act on investment opportunities in real time.
Although buy-side investors are required to disclose their holdings in a 13F, this information is only available quarterly. Overall, it can generally be beneficial for buy-side analysts and investment firms to keep their investment research and watchlists proprietary. The high level of market competition on the buy-side and the nature of its business generally results in confidentiality around all business ideas for the most optimal business benefits.
Duties of a Buy-Side Analyst
The buy-side analyst plays a central role in the buy-side exchange. Buy-side analysts routinely work at non-brokerage firms, including pension fund and mutual fund providers. These analysts provide research-based recommendations intended solely for the use of these major fund providers. Individual investors can see the sell-side recommendations, but the work of the buy-side is behind the scenes of large companies, and the research strategies and results of their analysis remain confidential.
Analysts employed on the buy side engage in corporate financial research and the development of investment strategy, which typically involves extensive research and financial modeling. They can also speak directly to companies in which they have an investment interest. Buy-side analysts primarily look for companies that fit well with a portfolio’s strategy based on certain investment metrics and companies that will generate the highest returns over time.
Since the roles of buy-side and sell-side analysts are markedly different, some companies may deploy certain policies to ensure that research efforts are divided. In companies that have both buy-side and sell-side analysts, a “Chinese Wall” can be built to separate the two departments, which usually involves security procedures and policies that prevent interaction between the two units.
Buy Side Example
John Smith works for a large investment bank invest his company’s money in the stock market, using a strategy he created himself. Over 10 years, his strategy has performed extremely well, outperforming the market by 10%. He decides to leave his company and create his own investment management company and invest money for wealthy individuals; in essence, Mr. Smith is creating a hedge fund.
He spends time marketing his business based on the returns of his strategy over the past 10 years and is able to raise $10 million in capital from various investors. He begins to invest this capital and buys a variety of securities, including stocks, bonds, futures contractsand choice, all aligned with its strategy. Mr. Smith’s business and his actions to buy these securities are an example of the buy side.