Buy-side refers to a market participant that acts as a dealer’s customer.

What Is the Buy-Side?

The financial institutions of a free-market economy include a segment called the buy-side: firms that purchase investment securities. These include insurance firms, mutual funds, hedge funds, and pension funds that buy protection for their accounts or investors to generate a return.

Opposite of the buy-side professional is the sell-side. Unlike the buy-side, sell-side efforts do not include making a direct investment. Instead, they assist the investing market with all activities related to selling securities to the buy-side, such as underwriting for initial public offerings (IPOs), providing clearing services, and generating research material and analysis.

Jointly, these two sides (buy and sell) make up the main activities of financial markets.

Understanding the Buy-Side

A business involved in buy-side activities will purchase stocks, bonds, and other financial products based on the needs and strategy of their company's or client's portfolio. The buy-side training takes place in many settings not limited to the financial institutions mentioned above. They also include trusts, equity funds, and high-net-worth individuals.

The whole point of buy-side investing is to create value for a firm's clients. They do this by identifying and purchasing underpriced assets that they believe will appreciate over time. Since the buy-side involves buying large blocks of market securities, the most prestigious companies often have a great deal of market power. These market titans are also closely watched by investors and the media.

Example of the Buy-Side

John Smith works for a large investment bank investing his company's money in the stock market, utilizing a strategy he created himself. Over ten years, his approach has done exceptionally well, outperforming the market by 10%. He decides to leave his firm, start his investment management firm, and invest money for high-net-worth individuals; in essence, Mr. Smith creates a hedge fund.

He spends time marketing his firm based on his strategy's returns over the past ten years and can raise $10 million in capital from various investors. He starts investing this capital and buys multiple securities, including stocks, bonds, futures, and options, aligning with his strategy. Mr. Smith's firm and his actions of buying these securities are an example of the buy-side.