Definition
“Buy Side” refers to the side of financial market made up of investing institutions such as mutual funds, pension funds, and insurance firms that purchase securities and other assets for their portfolios. These entities tend to hire financial analysts to conduct in-depth research and make investment recommendations. The term contrasts with “Sell Side,” which includes entities like investment banks and brokerage houses that sell stocks, bonds, and other investments.
Key Takeaways
- The “Buy Side” refers to firms that purchase securities, and includes investment managers, pension funds, and hedge funds. These entities tend to generate demand for stocks and other investments.
- Operators on the Buy Side are focused on research and decision-making to contribute to the growth of the investments they manage. They seek to create a return on investment primarily for their clients, rather than for their own firm or for individual traders.
- Unlike the Sell Side which focuses on creating and selling securities for clients to buy, the Buy Side uses a significant portion of its time analyzing and deciding what to purchase for their managed portfolios. They are continually seeking out the most promising opportunities for growth to deliver the best outcomes for their clients.
Importance
The finance term “Buy Side” is important as it refers to the segment of the financial world that involves buying decisions of investment institutions like mutual funds, private equity funds, hedge funds, pension funds, and insurance firms.
Such entities increase market liquidity, provide potential exit strategies for startup businesses, and have a significant impact on the valuation of securities.
The actions of these buy-side investors, including research, decision making, and transactions, influence market trends and prices, contributing significantly to financial markets’ efficiency and stability.
Explanation
The buy-side of the financial world refers to entities that are principally concerned with the purchase of investment services. This collective cohort includes investment managers, pension funds, life insurance companies, private equity funds, mutual funds, and hedge funds.
These parties are constantly in the market for buying securities and other investment types for their clients or their own accounts. These organizations command huge fund portfolios and wield significant buying power, thereby influencing market trends and investments.
The main purpose of the buy-side is to achieve the best possible investment returns for their clients or for the brokerages themselves, within an acceptable level of risk. In order to achieve this, buy-side firms conduct in-depth research to identify underpriced or valuable securities for purchase.
Furthermore, buy-side firms often employ strategies to reduce transaction costs, as these can eat into overall investment gains. This process of research and investment strategy creation significantly impacts which securities are purchased and actively traded on exchanges, thus influencing market trends and stock prices.
Examples of Buy Side
Mutual Funds: These are investment vehicles that pool money from various investors to purchase a diversified portfolio of stocks, bonds, or other securities. The mutual fund’s portfolio manager, as a representative of the buy-side, makes decisions about which securities to purchase based on their research and forecasts about future market trends.
Private Equity Firms: These are companies that buy ownership in private companies (those not listed on a public exchange). These firms use a combination of their own funds and borrowed money to acquire companies. They then try to improve the value of these companies with the ultimate goal of either selling them later at a higher price or taking them public.
Pension Funds: These are investment pools that pay for employees’ retirements. Fund managers have the responsibility for choosing the best investment strategies to grow the fund. This may involve buying stocks, bonds, real estate, or a diverse range of other investment options. The managers thus represent the buy side, making decisions on what to buy, when, and how much.
Buy Side FAQs
1. What does Buy Side mean?
The Buy Side refers to firms that are purchasing investment services. These are typically private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds. The activities of the buy side involve buying and selling of securities and other investment tools with the purpose of making a return on investment.
2. How does Buy Side differ from Sell Side?
While Buy Side firms purchase investment services, Sell Side firms are those that issue, sell, or trade securities. They are geared to help their clients (buy side firms) find ideal opportunities to place their money so they can get a return on their investment.
3. What are Buy Side analysts?
Buy Side analysts work for buy-side firms to research and recommend investment opportunities. They do a comprehensive analysis, evaluating different investment prospects, to assist the firm in making important investment decisions.
4. What is a Buy Side agreement?
A buy side agreement is a legal document between a broker and a buy-side firm outlining the terms and conditions of their partnership. It could cover areas like the roles and responsibilities of each party, confidential information, and payment arrangements.
5. What jobs are on the Buy Side?
Jobs on the Buy Side include positions like portfolio manager, buy side analyst, private equity analyst, trader, asset manager, and investment manager, among others. These roles are generally responsible for managing investments and portfolios, making buying decisions, and doing research to evaluate the potential of investment opportunities.
Related Entrepreneurship Terms
- Asset Management
- Private Equity
- Mutual Funds
- Hedge Funds
- Investment Strategy
Sources for More Information
- Investopedia: A comprehensive website packed with resources and explanations on a wide range of finance and investing terms, including the buy-side.
- CFA Institute: A leading educational platform that covers in-depth financial definitions and concepts, and offers programs like the Chartered Financial Analyst (CFA) program that elaborates more about the buy-side.
- Wall Street Mojo: This resource offers a plethora of articles and guides on financial concepts including the buy-side, particularly from an investment banking perspective.
- Morningstar: A robust finance website with a strong foundation in investment analysis, Morningstar provides various finance-related articles, some of which cover the concept of the buy-side in great depth.
