What does 'Buy Side' mean
Buy side is the side of Wall Street made up of investing institutions such as mutual funds, pension funds and insurance firms that tend to buy large portions of securities for money-management purposes. The buy side is the opposite of the sell side, which provides the public with recommendations for upgrades, downgrades, target prices and other opinions on the public market. Together, the buy side and sell side make up both sides of Wall Street.
BREAKING DOWN 'Buy Side'Specifically, buy-side firms are companies that purchase securities and other assets for their own needs or the needs of their clients. In addition to the institutions listed above, other buy-side firms include private equity funds, hedge funds, trusts and other proprietary traders.
For example, a buy-side analyst typically works in a nonbrokerage firm, such as a mutual fund or pension fund, and provides research and recommendations exclusively for the benefit of the company's own money managers as opposed to individual investors. Unlike sell-side recommendations, which are meant for the public, buy-side recommendations are not available to anyone outside the firm. In fact, if the buy-side analyst discovers a formula, vision or approach that works, it is kept secret.
The Secrecy Behind Buy-Side Investing
The whole point of buy-side investing is to create value for the firm or the firm's clients by identifying and purchasing underpriced assets. Since large market movements can affect the price of a security, buy-side investing only works if the strategy is kept from the public.
If, for example, a buy-side analyst notices, based on a proprietary financial model he is using, the price of a technology stock is lower than that of its peer group, yet it is a higher-performing company, the analyst is led to believe the technology stock's price will increase in the near term. Using the information he has discovered, he makes a buy recommendation to his key list of high-powered clients. If, however, the analyst makes the information public, perhaps by emailing an influential financial reporter, he loses the opportunity to get in at a low price. Instead, the share price skyrockets as the public clamors to purchase shares while the equity is still low.
This is why, at firms with both buy-side and sell-side analysts, a "Chinese Wall" is constructed to separate the two departments. However, there are some instances when an investment bank with a proprietary trading and public sell-side desk might lower said wall. A buy-side analyst who is exiting a position might ask a sell-side analyst to make a buy recommendation for the same position, effectively increasing the share price prior to it being sold.