What does "Buy Side" Mean?

Danielle DeLee

“Buy side” is a term used in finance to refer to a category of financial institutions. Generally, buy side institutions are the buyers in financial markets. They include entities like commercial banks, insurance companies, pension funds and mutual funds. These institutions pool funds from their customers to create a portfolio which they manage in order to generate returns. These returns may be retained by the company, as in the case of commercial banks, or returned to the investor, as in the case of mutual funds.

Buy side institutions pool funds from investors to create a portfolio, which is managed with the intent to generate returns.
Buy side institutions pool funds from investors to create a portfolio, which is managed with the intent to generate returns.

The financial world is made up of marketplaces. These markets are filled with financial products: essentially, traders are exchanging money for money with conditions. Financial markets, like goods markets, can exist only if there are people willing to buy and people willing to sell. Unlike goods markets, firms that sell financial products are usually not major buyers of other types of financial products. Finance can be separated into two basic groups of buyers and sellers.

Buy side firms are the actors in the market characterized by the assets they hold. Generally, they take money from investors to create a portfolio of investments. For example, a mutual fund company uses the money it gets from shares it sells to acquire a basket of assets, and the returns on that basket determine the payouts shareholders see. The company’s characteristic activity is accumulating a portfolio, which means the mutual fund company is buy side.

Sell side firms, the counterpart to buy side institutions, create the products sold in financial markets. These are the entities that issue bonds or underwrite stocks. These firms encourage investors to buy their financial products. The actions of these institutions create primary markets where newly originated goods are sold. Secondary markets, in which investors trade amongst themselves, are the domain of the buy side; the two interact, however, when buy side institutions wish to make large trades.

These terms are also commonly used to describe financial analysts. Essentially, these two categories of people do the same job. They both advise investors on which assets to buy, and the label an analyst carries depends on the nature of the firm he works for. Sell side analysts promote the products their companies create, so their advice is publicly available. Buy side analysts try to gain an advantage for their firms, so their advice is kept secret.

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