Same craft, three business models
Every analyst collects, analyses and recommends. What differs is the plumbing around them: who pays the salary, who is allowed to read the output, and what the employer does with it. The syllabus sorts analysts by the nature of their analysis, the coverage they take on, and the use their recommendations are put to. Three types come out of that sorting.
Sell-side: research that is meant to be seen
A sell-side analyst works for a firm that offers broking, investment banking or advisory services to clients. Her reports go out into the public domain and carry a specific recommendation on the security: buy, hold or sell. Alongside the call sits her estimate of the company's future earnings and a price target, the level she expects the stock to reach.
The name confuses almost everyone at first. Sell-side analysts do not sell shares. Their firms sell services, and widely read research is part of what draws clients to those services.
A report on a broking house's website that anyone can download, headed with a target price and a Buy rating, is sell-side. So is the initiation note an investment bank's research desk circulates to its institutional clients. Public reach plus a target is the signature.
Buy-side: research that stays inside
A buy-side analyst works for an organisation that buys and sells securities for its own book or for its investors: mutual funds, hedge funds, pension funds, alternative investment funds, foreign portfolio investors and portfolio managers. Her recommendations exist for internal consumption. The fund managers of her own firm read them and decide what the fund holds.
Because the report shapes what the firm is about to buy or sell, it circulates among top management and the investment team and stays out of the public domain. Publishing it would hand competitors the firm's positioning.
Buy-side research is often deeper than sell-side work, since it drives real money rather than a rating. The exam may describe a detailed, rigorous report and hope you assume rigour means publication. Look for the audience, not the depth.
Independent: research sold on its own
The third type works for research originators or boutique firms that are separate from full-service investment houses. Their product is the research itself, sold to others on a subscription basis. The client list is broad: investors, institutions, investment bankers, regulators, stock exchanges and fund managers.
Independent firms also take commissions for customised reports on a business, industry or sector. The purpose can be an investment decision, but it can just as well be understanding a competitive landscape or preparing for a merger or acquisition.
| Sell-side | Buy-side | |
|---|---|---|
| Employer | Broking, investment banking, advisory firms | Mutual funds, hedge funds, pension funds, AIFs, FPIs, portfolio managers |
| Audience | Public domain, the firm's clients | Internal: the firm's own fund managers and top management |
| Contains | Buy, hold or sell call, earnings expectations, price target | Recommendations on what the fund should buy, hold or sell |
| Published? | Yes | No |
The independent analyst sits alongside both: not employed by a broker or a fund, paid by subscription or commission, and free to work for a regulator or an exchange as easily as for an investor.
The others
Newspapers, media companies and consolidators of information also put out research reports. They matter as sources, and the exam occasionally lists them as a fourth category of producer, but they are not one of the three core types the classification questions are built around.
Ask two questions in order. Does the report leave the firm? If no, buy-side. If yes, is the firm selling the research itself on subscription, or is the research a service wrapped around broking, banking or advice? Subscription means independent; wrapped around a service with a public target price means sell-side.
- Sell-side analysts publish in the public domain with a buy, hold or sell call, expected earnings and a price target. Employers are broking, investment banking and advisory firms.
- Buy-side analysts work inside asset managers (mutual funds, hedge funds, pension funds, AIFs, FPIs, portfolio managers). Their recommendations are for their own fund managers and are not public.
- Independent analysts sit in boutique research firms separate from full-service investment houses and sell research on subscription, often customised, to investors, institutions, bankers, regulators, exchanges and fund managers.
- Media houses and information consolidators also publish research, but they are not one of the three core types.