When the average investor thinks of an analyst, he or she usually imagines an employee of one of the big Wall Street firms. Analysts at Goldman Sachs and Morgan Stanley who issue ratings and price targets on specific stocks probably come to mind. Most of those ratings are considered market news; many wind up moving stocks. Those analysts – known as “sell-side analysts” – are only, however, a portion of all analysts. Lesser-known — but still-influential — “buy-side analysts” work for asset managers, mutual funds, hedge funds, and pension funds, among others. And while their work doesn’t get the notoriety of their sell-side brethren, buy-side analysts represent a powerful force in the markets.
Sell Side vs Buy Side
The two groups generally are differentiated by their employers. Sell-side analysts work for firms that “sell stock,” i.e. brokerage houses, market makers, and investment banks. Buy-side analysts work for businesses that usually buy stocks, including hedge funds, pension funds, and other institutional investors.
As a result, the job descriptions of buy-side analysts and sell-side analysts tend to be somewhat different. Sell-side analysts get a lot more press because getting press is part of their job. Sell-side firms benefit when sell-side analysts become more well-known. Having a sharp, famous sell-side analyst can bring in clients who want more direct access to that analyst.
By contrast, buy-side analysts generally are quiet because that is part of their job. If a pension fund wants to buy $10 million of General Electric (NYSE:GE) stock, it doesn’t want its analyst to tell the market a huge order is on the way before the shares are purchased. But buy-side analysts usually don’t discuss stocks even after their employer purchases them.
So What Do Buy-Side Analysts Do?
All told, in a lot of ways, life as a buy-side analyst could be considered simpler. Sell-side analysts target the investing public; they either directly or indirectly try to sell their research and their opinions to the masses. And in many ways, the research itself – and the price targets in particular – aren’t the true end games. Institutional investors who buy sell-side research aren’t simply following analysts’ “Buy'”or “Hold” ratings. (There are very few “Sell” ratings.) Rather, institutional investors are looking for the access and information that big Wall Street firms can get.
Buy-side analysts, by contrast, generally have one customer: their portfolio manager. Their research is considered proprietary. They do have some level of access to the management of publicly-traded companies, depending on the size of the firm. But they generally focus more on fundamentals, with an eye toward recommending (or not recommending) a specific security.
In fact, for people who enjoy stock analysis, the buy side can be a more rewarding career path. Buy-side analysts generally don’t get famous. They rarely appear on TV or in print. But buysiders still can move the market. Their research leads to large orders and can be very valuable for end investors.
But the pressure of the buyside can be more intense. A sell-side analyst can be wrong about a major stock and not suffer any major repercussions. As long as he is able to continue speaking with the management of the company he covers, and he continues to be backed by his firm, his job is probably safe. On the buyside, a few poor recommendations can lead to millions of dollars in losses and a job search.
Which Way Should I Go?
For those considering a career as an analyst, the sell-side versus buy-side decision really comes down to personal preference. Market purists might like the focused world of the buyside better. Those interested in working at bigger firms — and those who like touting their picks — could choose the sell side. The two jobs are indeed very different , even if the titles seem similar.
As of this writing, Vince Martin has no positions in any securities mentioned.
