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Sell-Side vs. Buy-Side Equity Research

Step-by-Step Guide to Understanding Sell-Side vs. Buy-Side Equity Research

Last Updated April 21, 2024

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Buy-Side vs. Sell-Side Equity Research: Comparative Analysis

Buy-side equity research analysts work on behalf of institutional investment firms such as mutual funds and hedge funds.

In short, buy-side analysts have “skin in the game” because their investment thesis is not merely a recommendation, but rather, a decision with real monetary consequences.

The commonality between a buy-side analyst and sell-side research analyst is that both conduct in-depth research into potential investment opportunities and closely follow the public markets to identify trends.

An equity analyst must be capable of analyzing a company’s financial statements, including understanding the unit economics that pertain to a particular company or sub-group of companies that operate in the same (or an adjacent) industry.

Once the operating drivers that determine a company’s performance is understood, the equity analyst can form a thesis on the implied valuation and growth potential of a company.

On the other hand, sell-side analysts are employed by investment banks and brokerage firms. On behalf of clients, the sell-side analysts publish recommendations to facilitate informed investment decisions.

However, while the research reports can contain practical insights surrounding a specific company (and industry), the recommendations should not be taken at face value for a multitude of reasons.

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What is Sell-Side Equity Research?

To reiterate, sell-side equity research analysts are typically part of an investment bank and focus on a universe of stocks within one or two industries in order to provide insightful investment ideas and recommendations.

The research reports are accessed by institutional investors, as well as an investment bank’s salesforce and traders, who in turn communicate those ideas with institutional investors.

Certain financial data service providers—such as Capital IQ, Factset, Thomson and Bloomberg—can also resell the data, with notable end users being investment banking clients and M&A advisory services groups, which use sell-side equity research to help forecast company performance in presentations and pitchbooks.

Sell side equity research analysts communicate formally through research reports (and notes) that place buy, sell and hold ratings on publicly-traded companies in their coverage, as well as through less formal direct phone, email and in-person communication with institutional investors.

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What is Buy-Side Equity Research?

Buy-side equity research analysts, on the other hand, analyze companies in order to make an actual investment in line with their firm’s investment strategy and portfolio.

Unlike sell-side research, buy-side research is not published.

Most often, buy-side analysts work for a variety of investment funds:

  • Mutual Funds
  • Hedge Funds
  • Private Equity
  • Other (Insurance, Endowment and Pension Funds)

Future of Sell-Side Equity Research

The future of sell-side research is less certain than ever: Institutional investors typically pay for sell-side research through “soft dollar” arrangements that lump research fees directly into trade commission fees investment banks charge the buy side.

However, regulations in Europe starting in 2017 are forcing buy-side investors to unbundle the research product from trading fees and explicitly pay for research.

As a result, the value of sell-side research has been under the microscope, and it’s not looking good. The change is predicted to significantly curtail the usage of sell-side research by the buy side.

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