There are two major types of financial analysts: buy-side and sell-side. Buy-side analysts work for investment firms and make stock recommendations that are available only to the management of funds within that firm. Sell-side analysts work for

Question

brokerage firms and make recommendations that are used to sell stock to the brokerage firms' clients, which include individual investors and managers of investment funds. What would be the differences in tasks and motivations of these two types of analysts?

Answer 1

Sell-side analysts work for brokerage houses and provide brokers with information to provide to their clients on the attractiveness of different firms as investment vehicles. The sell-side analyst's main task, therefore, is to analyze companies, usually using fundamental analysis, where there are opportunities to interest customers to either buy or sell the stock. Sell-side analysts produce a report presenting their analysis, making forecasts of future financial information, and recommending clients to buy, sell, or hold a stock.
Because brokerage houses generate income from commissions earned on stock trades carried out for these clients, they provide direct and indirect incentives for sell-side analysts to write reports that generate commission business. The analyst is viewed as valuable because he/she has developed an intimate knowledge of recommended firms. In the short run, a persuasive analyst's report can convince customers to buy or sell shares of a company immediately. Of course, if the analyst's recommendations later turn out to be consistently unprofitable, investors will be unlikely to continue using their recommendations for making buy/sell decisions. The most effective sell-side analysts often play a role in selling new issues to institutional investors, by accompanying investment bankers from their firm on road shows to promote new offers.
Buy-side analysts work for investment funds and make recommendations about investment opportunities that are consistent with the fund's operating guidelines. In preparing a recommendation, an analyst can either put together his/her own reports for individual companies or evaluate the reports of several sell-side analysts. The buy-side analyst must be able to evaluate competing buy and sell recommendations made by various sell-side analysts.
The buy-side analyst's motivation is to earn the highest returns for the investment fund. The buy-side analyst is often compensated based on the success of her recommendations. Investment funds typically charge fees based on the amount of capital managed by the fund. Moreover, a successful fund attracts additional capital from investors, generating more revenue for the investment fund's managers. Hence, the buy-side analyst's compensation is closely tied to the quality of her recommendations.