Buy-Side Analyst vs. Sell-Side Analyst: An Overview
The main differences between these two types of analysts are the type of firm that employs them and the people to whom they make recommendations.
A sell-side analyst works for a brokerage or firm that manages individual accounts and makes recommendations to the clients of the firm. A buy-side analyst usually works for institutional investors such as hedge funds, pension funds, or mutual funds. These individuals perform research and make recommendations to the money managers of the fund that employs them.
Buy-side analysts will determine how promising an investment seems and how well it coincides with the fund's investment strategy; they'll base their recommendations on this evidence. These recommendations, made exclusively for the benefit of the fund that pays for them, are not available to anyone outside the fund. If a fund employs a good analyst, it does not want competing funds to have access to the same advice. A buy-side analyst's success or talent is gauged by the number of profitable recommendations he or she makes to the fund.
A buy-side analyst is much more concerned about being right than a sell-side analyst is. In fact, avoiding the negative is often a key part of the buy-side analyst's job, and many analysts pursue their job from the mindset of figuring out what can go wrong with an idea.
Buy-side analysts, in general, have broader coverage responsibilities. It is not uncommon for funds to have analysts covering the technology sector or industrials sector, whereas most sell-side firms would have several analysts covering particular industries within those sectors (like software, semiconductors, etc.).
Sell-side analysts are those who issue the often-heard recommendations of "strong buy," "outperform," "neutral," or "sell." These recommendations help clients make decisions to buy and/or sell certain stocks. This is beneficial for the brokerage because every time a client makes a decision to trade stock, the brokerage gets a commission on the transactions.
The job of a sell-side analyst is to convince institutional accounts to direct their trading through the trading desk of the analyst's firm—the job is very much about marketing. In order to capture trading revenue, the analyst must be seen by the buy-side as providing valuable services. Information is clearly valuable, and some analysts will constantly hunt for new information or proprietary angles on the industry.
[Important: Since nobody cares about the third iteration of the same story, there is a tremendous amount of pressure to be the first to the client with new and different information.]
This is not to say that sell-side analysts recommend or change their opinion on a stock just to create transactions. However, it is important to realize that these analysts are paid by and ultimately answer to the brokerage, not the clients. Furthermore, the recommendations of a sell-side analyst are called "blanket recommendations," because they're not directed at any one client, but rather at the general mass of the firm's clients. These recommendations are inherently broad and, as a result, they may be inappropriate for certain investment strategies. When you are considering a sell-side recommendation, it's important to determine whether the recommendation suits your individual investment style.
- The main differences between buy-side and sell-side analysts are the type of firm that employs them and the people to whom they make recommendations.
- Buy-side analysts will determine how promising an investment seems and how well it coincides with the fund's investment strategy.
- Sell-side analysts are those who issue the often-heard recommendations of "strong buy," "outperform," "neutral," or "sell."