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Understanding Stock Analysts
Insights into Sell-Side and Buy-Side Analysts
The Sell-Side Analyst:
The sell-side analyst typically works for a broker or investment bank and provides recommendations to the house’s clients. The term “sell-side” does not imply a generally bearish attitude, but rather describes the fact that these analysts are internally assigned to sales. An important insight arises from understanding this circumstance.
Profiting from Analysts’ Analysis:
Typically, recipients do not pay for the research; the numerous buy and sell recommendations are free. However, client satisfaction is only the second most important goal for investment banks and brokers because the primary goal, without a doubt, is to make a lot of money. In this sense, the analyses are created – they are intended to generate orders and thus lead to income through commissions. Analyses are not an act of charity but rather a suitable instrument for sales.
The Buy-Side Analyst:
The buy-side analyst usually works for various types of fund management companies (pension funds, mutual funds, hedge funds). He performs the exact task that a layperson would expect: he uses his expertise and experience to make early buy or sell recommendations that are beneficial to his employer’s performance. His performance is measured by this, and often his compensation depends on it. This research would be highly interesting for any investor, but unfortunately, it is not for sale and is exclusively created for the trading department of the analyst’s own company.
Critical Evaluation:
In theory, one could critically comment that a sell-side analyst must inevitably change his opinion more frequently to encourage the house’s clients to trade more frequently and thereby increase revenue. In practice, this assumption cannot really be confirmed. Each analysis can be attributed to a specific person; anonymity is taboo. Furthermore, recognizing a trend before the broader public does enhances the employer’s reputation.
Practical Tips:
- Consider that analyses are intended to generate orders
- Analyses are often used as a sales tool
- Valuable buy-side analyses are rarely available to individual investors
- Sell-side analyses do not necessarily have to be bad. The reputation of the analysis depends on it
- Do not rely solely on one analysis; seek another opinion or critically examine the arguments yourself
Our Conclusion:
Please never open a position based on a brief analysis you have read somewhere. The terminologies alone vary greatly, and the “buy” recommendation loses value when “Strong buy” or “Very strong buy” are also possible. Third-party analyses, however, are useful for reconciling your own opinion with another perspective.
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