US financial markets are split into two segments of nearly equal size: the buy side and the sell side. The buy side includes firms that are in the business of purchasing securities and other assets for their own accounts or the accounts of their clients. Large institutions like mutual funds, pension funds, hedge private equity funds, venture capital companies, trusts, insurance companies, and proprietary trading firms are examples of firms that are on the buy side. The firms on the buy side have money to spend and are looking for investment opportunities that will provide the greatest value for their clients.

What Do Buy-Side Firms Do?

A buy-side firm is in the business of making direct investments in stocks, bonds, and other securities and financial products for the benefit of its clients’ money management or for its own portfolio needs. A mutual fund is an example of a buy-side firm with wide impact, as nearly 45% of all US households have some mutual fund ownership through either direct investment or ownership through 401(k) and other retirement plans.

Mutual funds create a portfolio of securities and sell individual interests of that portfolio to investors. Their portfolio managers are charged with managing the portfolio investments and trading them as necessary to meet the fund’s stated investment objectives. Investors achieve substantial diversification for a relatively small minimum investment because they own a proportionate share of all the securities held within the portfolio. They are also relieved of selection risk because the portfolio manager makes all investment decisions on their behalf. As of June 30, 2019, nearly $5.8 trillion in assets were held in mutual funds according to the Investment Company Institute.

Another buy-side example, hedge funds are also formed with investor capital and managed by a professional manager. They differ from mutual funds because they hold a broader range of assets, which could include non-securities assets, like real estate, commodities, and stakes in other companies. They also engage in a wider range of investment strategies with high risk exposure, including short stock and options positions, as well as purchases on margin. Their name comes from the long and short stock positions they hold, which are intended to be profitable despite up- or down-market fluctuations – the market strategy of “hedging.” While mutual funds appeal to retail investors, hedge funds cater to institutional clientele or wealthy individual investors. They have high minimums, high fees, and “lock-up” periods that prevent investors from withdrawing their capital. These features make them less appealing to and less appropriate for typical retail investors.

Many buy-side firms are household names. The top five global asset managers as of the end of 2018 were BlackRock, Vanguard, State Street Global Advisors (SSGA), Fidelity, and BNY Mellon Investment Management. Those who have 401(k) accounts are likely to be owners of one if not more of the funds of these firms.

In summary, buy-side firms share common objectives but differentiate themselves through varied investment strategies and levels of risk exposure. Buy-side firms’ main orders of business are to:

  • Manage client investment
  • Determine investment strategy (whether to buy, hold, or sell)
  • Maximize investor returns
  • Research investment opportunities
  • Perform financial modeling and valuation
  • Find, recruit, and grow assets under management (AUM)

Working on the Buy-Side of the Financial Markets

Buy-side careers are considered some of the most attractive opportunities in the financial markets. They require high-level technical skills and command some of the highest salaries and performance bonuses. These careers may also offer a better work-life balance than comparable sell-side positions, as they hold the funds to invest, and therefore hold more control over scheduling and executing deals.

Persons choosing buy-side career paths must be highly proficient in one or more of the following areas:

  • High quantitative and risk-management skills
  • Customer engagement and relationship management
  • Sales, presentation, and closing skills
  • Research development
  • Investment strategy and valuation
  • Multiple-language skills for global engagements

This exceedingly competitive market space attracts the best and brightest performers. Improve your chances with a strong foundation in a business (preferably finance) concentration at a reputable school and an internship with a respected financial brand.

An oftentimes essential credential for anyone considering a buy-side or other securities career is a securities license. Obtain this qualifying license by passing the SIE Exam with the help of Knopman Marks Financial Training. We’re here to help you every step of the way as you prepare for a rewarding career in finance.

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Written by Marcia Larson
Marcia Larson is Vice President, Faculty, at Knopman Marks Financial Training, New York, NY. She has extensive experience in financial licensing and regulatory training, having authored, developed and presented courseware for numerous securities and insurance exam preparation and continuing education and compliance programs. Before joining Knopman Marks, Marcia was Director of Annuity Products and Business Development at CUNA Mutual Group, where she developed and marketed industry-leading annuity products and retirement solutions and implemented distribution relationships. She was previously VP, Securities Products for Kaplan Financial, managing securities training products and subsequently, international training and businesses development. Marcia has trained thousands of financial industry exam candidates throughout their careers, and also college students as an adjunct professor. Marcia was a summa cum laude graduate of Wartburg College with degrees in Business Administration and Piano Performance. Marcia also holds the designations of Chartered Financial Consultant® (ChFC®), Chartered Life Underwriter (CLU®), Certified Employee Benefit Specialist (CEBS), and Fellow Life Management Institute™ (FLMI®). She currently teaches the SIE, Series 6, 7, 24, 50, 52, 63, 65, and 66 exams.