The financial market has two main parts: the buy side and the buy side.
The buy side is the side of the financial market that buys and invests a large portion of the funds to generate income or capital. They have to manage the customer’s money and make investment decisions with the aim of achieving the best possible return on capital.
The sell side, the other side of the financial market, deals with the creation, promotion and sale of commercial securities to the public. Therefore, the buy side focuses on generating wealth for its customers by buying cheap assets that are good for the future. Investment funds are primarily involved in the capital markets by advising on mergers and acquisitions and helping companies raise capital.
The sell side are firms whose business is to manage money by investing in securities to achieve profits for customers. Buy-side companies include mutual funds, hedge funds, pension funds, private equity firms, trusts, mutual funds and high net worth individuals. Buy-side firms manage and grow AUM (assets under management) compared to the buy-side they invest in in advisory buy-side. Buy-side companies that focus on adding value to customers by selling assets tend to increase value. Since they have the ability to buy a large amount of securities, their activities have attracted attention from investors and the media.
Buy-side companies use different strategies to achieve their goals. The most common strategy is to buy and hold long-term growth stocks. Hedge funds often make a purchase of undervalued securities and sell overvalued securities short in order to make a profit from the change in prices. Another strategy, event-driven investing, aims at gaining benefits from specific events such as mergers or company restructures that can bring a significant impact on the stock prices.
Most of the managers work based on either active or passive management: active managers will try to beat the market through selected individual investments, while a passive manager invests in index funds or ETFs (Exchange traded funds) to match the overall performance of the market.
Investment Analysis forms the backbone for buy-side firms; the buy-side firms adopt various techniques like financial modelling, risk assessment, and valuation to find out investment opportunities. The analyst needs to thoroughly understand financial statements and changing market trends to invest. Investment Analysis also involves understanding historical data, forecasting for financial modelling etc to understand the market conditions.
Portfolio management further diversified investments in various parts so that returns can be maximized based on their risk levels. Continuous investment performance tracking helps the firms to decide whether they should hold, sell or buy its holdings to match their desired portfolios.
The buy-side market entails different kinds of institutional investors, such as;
Mutual Funds and ETFs: Mutual Funds manage around $17 trillion in assets under active management and a huge portion of that in equities, bonds, and balanced funds. Exchange Traded Funds generally offer more diversified benefits than mutual funds but without any active management expenses.
Hedge Funds: It is best known for its trading strategies on two specific dimensions – short selling and leveraged exposure – hedge funds hold roughly $3.1 trillion in assets worldwide. Since hedge funds are significantly less regulated than mutual funds, it is only available for high-net-worth investors or institutional investors.
Private equity firms: Oversee approximately $4.7 trillion assets and invest in companies with the purpose of improving their operational performance and capital structure in ways that can lead to the highest possible return. Private equity firms prefer to invest huge amounts of equity in companies and might participate in logistics and strategic management.
There are many steps in the investment process for a buy side company.
First they start by looking for investment opportunities for their company, then their highly researched market analyst conducts thorough financial analysis of stocks. Efforts are made to conduct investigations of a company’s financial health, business operations and corporate position, including risk. When the conditions are favorable, the firm will proceed into trade execution where it buys the selected security to include into its investment portfolio.
At last, they will monitor and adjust the portfolio according to the intentions of the firm or just to accommodate changes in the market. It is this fluid process that helps to optimize a portfolio in such a way that it can manage risks more effectively while maximizing better returns.
Thus, Buy-side investment firms play a vital role in the financial market by doing asset management for its clients to earn maximum returns. It includes mutual funds, hedge funds, private equity firms, and pension funds that are used to purchase undervalued securities that have potential to grow in future.
Their investment strategies range from holding for the long term to investing based on events using financial analysis and fund management to identify investment opportunities and reduce investment risk.
The basic investment process includes research, due diligence, trading and ongoing portfolio monitoring. Investing should maximize returns while trying to manage risk by matching companies’ investment goals with market changes.