What it means
The financial markets can be thought of as a seller and buyer relationship. On one side are firms that help companies issue shares and bonds, trade them and provide research.
On the other are institutions such as pension funds, mutual funds and hedge funds that buy and hold them. Sell-side firms earn their money in several ways.
They charge fees for underwriting new securities, commissions for executing trades and advisory fees on mergers and acquisitions. Market makers profit from the difference between buying and selling prices, known as the spread.
Sell-side research analysts publish reports, forecasts and ratings on companies. These are shared with clients of the firm, and are often free to the buy side in return for trading business.
Because the firm earns money from deals and trading, readers should be aware that this can create conflicts of interest, and rules require analysts to disclose them. The buy side uses sell-side services but also does its own work.
A buy-side analyst reads sell-side research as one input, then builds an independent view. Large buy-side firms can negotiate on commissions and may demand better service as a result.
For non-specialists, the phrase often appears in news about earnings and company expectations. When articles say that sell-side analysts expect a company to earn a certain amount, they are describing the average of forecasts published by banks and brokers.
Companies pay close attention to this consensus because beating or missing it can move their share price. Regulation shapes how the sell side behaves.
Rules separate research from investment banking, require disclosure of conflicts and limit what analysts can say before a deal. These barriers are often called information walls, and they exist to stop confidential deal information reaching traders and analysts.
In practice
Real-world examples.
Example
A company plans to float on a stock exchange and hires an investment bank to manage the offering. The bank prepares documents, finds investors and sells the new shares. It earns an underwriting fee for its work, and the fee is usually a percentage of the money raised. Its sales team then contacts investors to gather orders.
Example
A brokerage firm publishes a report on a retailer saying that it expects earnings to rise 8%. The report goes to the firm's institutional clients, who include pension funds. Some of those funds use the analysis in their own research, while others ignore it and rely on their own forecasts. Either way, the report helps set the market's expectations for the retailer.
Example
A market maker quotes both a buying and a selling price for a bond. It earns the difference as a spread when it trades with investors. This activity makes it easier for investors to buy and sell, because there is nearly always someone ready to trade. The market maker takes on the risk of holding the bond until it can be resold.
Case study
Seen in the real world.
Stonebridge Manufacturing is a fictional company preparing a bond issue of $150,000,000. Its treasurer, Grace, chose a sell-side bank to arrange the deal based on its distribution network and its record with similar issuers.
The bank reached out to dozens of buy-side investors, gathered feedback on pricing and sold the bonds at a competitive interest rate. This is an illustrative story, but the process is typical. The bank charged an underwriting fee and Grace judged that the fee was worth paying, since the deal was priced well and was fully subscribed within a day.
After the deal, the sell-side analyst covering Stonebridge published a note on the company's credit story. Grace used the note to see how the market understood her plans, and adjusted her investor presentations where messages were unclear.
Watch out
Common mistakes.
- Assuming sell-side research is neutral. The firm earns fees from trading and deals, so conflicts of interest are possible.
- Thinking sell side means only those who sell shares. It covers a wide range of services, including advice, trading and research.
- Confusing the sell side with the buy side. The sell side serves and sells to investors, while the buy side invests money for itself or its clients.
Questions
People also ask.
Who is on the sell side?
Investment banks, brokerage firms, market makers and the research teams that support them make up the sell side. Some large banks have both sell-side and buy-side arms, which are kept apart by internal rules.
Who is on the buy side?
The buy side includes pension funds, mutual funds, hedge funds, insurers and other investors that purchase securities. These investors pay the sell side for trading, research and access to new issues.
Why do companies care about sell-side analysts?
Their forecasts form the market's expectations, and results that beat or miss them can move the share price. Management teams therefore spend time explaining their strategy to analysts.
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