The sell side sells and rates securities for the buy side, including institutional and retail investors. Investment banks often service both sides, selling securities to investors on behalf of clients. Sell-side research analysts produce reports and ratings, but conflicts of interest can arise. Regulations aim to prevent unethical behavior.
The sell side represents a segment of the financial markets that is responsible for selling and rating securities for its counterparty, known as the buy side. Typical sales side jobs include Wall Street research analysts, traders, and investment bankers. Clients of the sell-side community include institutional investors including mutual funds, retirement funds, hedge funds, or other buy-side institutions. Retail or individual investors also make up the buy side, although sell-side research generally targets the largest financial institutions.
An institutional-size investment bank is a financial institution that helps companies raise money in the capital markets and also maintains a brokerage. Due to an extensive research team, in addition to its institutional sales team, an investment bank often services both the buying and selling communities. Selling investment banking is responsible for selling securities to investors on behalf of clients in a deal, such as in an initial public offering. Secondary participants can include large institutional buyers, including mutual funds or hedge funds, that are in the stock market.
A sell-side research analyst is responsible for producing reports on a publicly traded company and assigning a rating to the stock. Typical ratings may include buy, sell, or hold recommendations. A sell-side analyst might base her rating on projected future earnings growth at a company, which is an indication of how profitable that entity is expected to be. The more profitable a company is, the better its share price will be. Investors often make trading decisions based on analyst research.
Relationships between sales analysts and publicly traded companies can be controversial. An analyst is expected to produce unbiased information about a stock. However, institutional brokerage firms that employ research analysts might also employ secondary selling traders whose same commissions are earned based on the number of shares they sell. If there is a lack of ethics in the company, a company might pressure a research analyst to recommend a stock in the hope that the trader will sell more shares.
This conflict of interest blurs the lines between the buying side and the selling side. It is up to a regulatory body in a particular region to set rules that prohibit any unethical behavior. In the US, for example, the Sarbanes Oxley Act of 2002 was formed in part to deal with conflicts of interest for sales analysts.
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