Section 2.3. Key Concepts: Buy-Side vs. Sell-Side

Careers in finance are often categorized as either buy-side or sell-side. Let's explore each.

Buy-side: The "buy-side" refers to those that manage investments. Some important buy-side examples include the following:

Insurance companies: Insurance companies receive premiums from their customers and promise to make a payment should a specified event occur. For example, an insurance company may provide health insurance. It receives premiums from its health insurance customers and pay for their health care should they become ill. An important part of successfully managing an insurance company is the careful investment of the premiums it receives from clients to ensure it has sufficient funds to make the payments promised to its clients. Hence, an insurance company is a buy-side entity and the management of its pool of funds is a buy-side role.

Pension funds: Pension funds receive payments from a given employer and promise to provide its employees pensions following their retirements. For example, a public school district will make periodic payments to a pension fund. In return, the pension fund provides retired employees of the public school district a pension consisting of a fixed amount of money every month following their retirement. An important part of successfully managing a pension fund is the careful investment of the payments it receives from employers to ensure it has sufficient funds to make the pension payments promised to retirees. Hence, a pension fund is a buy-side entity and the management of its pool of funds is a buy-side role.

Mutual funds: A mutual fund manages a pool of investments for its investors, subject to heavy regulation. For example, a mutual fund may attract investors through promising to strive for returns that are higher than the returns of the S&P 500 stock index. The mutual fund must carefully manage the investments it receives from investors as it works to achieve the targeted performance. Hence, a mutual fund is a buy-side entity and the management of its pool of funds is a buy-side role.

These are just three among many other buy-side entities and roles. Some other examples include:

Hedge funds

Private equity funds

Real estate investment trusts (REITs)

Master limited partnerships (MLPs)

Exchange-traded funds (ETFs)

Endowment funds

Sovereign funds

While there are a wide-range of buy-side entities and roles, the commonality is that they all manage investments.

Sell side: The "sell-side" refers to those that provide services to the buy-side. For example, a mutual fund manager wishes to buy 10,000 shares of Microsoft. The mutual fund manager will communicate this interest to a dealer on a trading floor. The dealer will work to enable the mutual fund manager to purchase the 10,000 shares. In this example, the mutual fund manager is the buy-side and the dealer is the sell-side.

Question:

Those that manage investments are on the __________.