Let’s take a step back and distinguish between two financial terms that are tossed around: the sell-side and the buy-side. If you already know the difference, good for you—feel free to skip to chapter six.
Sell-Side
The most common example of a sell-side firm is an investment bank. Whether they’re selling financial products, research, or advice, investment banks are in the business of sales though they don't own what they sell. Further clarification on “investment banks” and those who work in them is coming in a few paragraphs. Relax.
Another example of the sell-side is independent-research firms. Typically, these firms churn out research reports on companies, ultimately advising their clients to buy or sell a given company’s stock. The key to this business is making noise if and when you’re right. Flip on CNBC and you’ll hear an interview with some guy pounding the table about how great an opportunity it is to buy Company X’s stock—there’s nothing he’s more certain of than this. Take a look at the bottom of the screen or at the banner in the background of the screen where his firm’s name will be displayed. If the word “research” appears in the name, this guy—by law—can’t even buy the stock he’s so certain is the world’s greatest buy. His value is in having conviction in his opinion. You may ask, What happens if the stock of that company plummets to zero? Who cares? The research guy moves on to his next great idea, making more noise and dismissing his prior idea that was dead wrong. If you can get one or two of these ideas to hit and have the platform to promote it when you’re correct and the resources to squash it when you’re wrong, you’ll be in good shape.
The typical progression, at least at the junior level, is to learn the financial trade on the sell-side, then apply those skills at a buy-side fund. This, then, begs the question, how useful are the products sold by the sell-side if it serves primarily as a training ground for buy-side professionals? Would you heed the advice of a coach who never played the sport himself, who never had his ass on the line?
Buy-Side
This is where fortunes are made. The buy-side includes hedge funds, private equity funds, venture capital funds, and any other fund where capital (fancy word for money) is put at risk. Unlike the sell-side, buy-side investors have to come up with the idea, then take it one step further by actually putting money on the line. While buy-side funds typically raise money from outside investors, these money managers are often required to invest a healthy chunk of their own money into the fund. To say someone works at a hedge fund tells you very little, aside from the fact that the individual is a part of a firm that invests in some sort of asset, or really anything.6 Among hedge funds, strategies and investment horizons vary enormously.7 One hedge fund may use proprietary algorithms to take advantage of tiny price discrepancies in stocks, where investments in positions can literally last fractions of a second. This type of quantitative strategy requires expertise in mathematical engineering. On the other side of the spectrum are “long only” funds, which typically market their managers as long-term investors who perform fundamental research on publicly traded companies, combing through financial statements and performing an extensive review of the company’s business and industry dynamics. Often, these managers will take large positions (invest a shitload of money) in a few stocks, with the goal of realizing compounding returns over three to five years, and in an ideal world, never selling. While success on the sell-side means convincing clients you have great ideas (and getting them to do deals), success on the buy-side involves having the market prove you correct. This isn’t to say that buy-side investors don’t make as much noise as sell-side firms. If, instead of “research,” the word “capital” is in the firm’s name of the guy being interviewed on CNBC, you’re hearing from an investor whose fund probably already has a stake in the stock he’s discussing.
Investment Banking
The definition of “investment banking” has always eluded me.
I had a college roommate who got a job doing “investment banking at Merrill” after graduation. He tried to explain his job to me, but I preferred the image of him stuffed inside a Bank of America ATM, distributing cash to individuals in multiples of twenty or fifty dollars. Then there was the guy I met at the beginning of senior year, who, fresh off his investment banking internship at Goldman, was at a party and told one of my teammates that he would crush him with his wallet. He didn’t, though my teammate did take down the Goldman kid’s girlfriend that night. I got in there too.
My understanding of “investment banking” evolved marginally over the next few years. By the time I entered business school, I’d read several books that purported to answer the question, spoken with “investment bankers” who hop-scotched around the answer, and ultimately Googled “investment banking” and got through the first three paragraphs of a Wikipedia article.
Inside investment banks, in addition to the investment bankers, there are lawyers, public-relations teams, human-resource professionals, and an IT department. These people work at investment banks. However, there are only three discrete jobs that qualify one as an “investment banker”: sales and trading, research, corporate finance.8
One commonality among the three investment banking jobs is that they require the investment banker to act as an agent (remember, sell-side) rather than a principal. Investment bankers make fees by selling either securities, research, or advice. Success (at least financially speaking) is not measured by being right or wrong, but by generating activity. In other words, despite having the word “investment” in their titles, investment banks do not act principally as investors, though much of their marketing material will claim they invest in their employees. Aside from that, the skill sets and day-to-day duties for “investment bankers” vary greatly across the three roles.
Below is my attempt to distinguish between the three “investment banking” jobs.
Sales and Trading
The sensationalized world Michael Lewis helped perpetuate in Liar’s Poker was drawn from sales and trading.
Salespeople and traders are lauded for their quick thinking under pressure. It’s why there’s the perception that competitive college athletes do well in the industry. There are few other requirements needed to thrive. I know because the only job offer I had after I stopped playing hockey was in sales and trading. “It’s like a locker room!” they told me. But as I spent more time on the trading floor of various banks, it felt less like being in a locker room and more like being around the guys who didn’t make the team.
If she says she works “on the _____ desk,” and you didn’t even ask—that’s sales and trading. The massive fines you read about in the paper—that’s sales and trading too.
An important distinction is the function of traders on the buy-side (at investment firms) and the sell-side (at banks). Buy-side traders take a position in a security, and if they’re long, they buy a lot and hope the price increases (if short, then the opposite). Sell-side traders, on the other hand, don’t give two shits where the security’s value goes. As agents, the sell-side traders make their money by taking a commission on the trade itself. Another distinction is between salespeople and traders: salespeople are the ones yelling on the phones, while traders are yelling at their Bloomberg Terminals.
Once upon a time, banks employed proprietary traders (prop traders), who took principal positions in securities, which was great when the market was soaring but less great when everything tanked. When banks did away with prop trading due to the massive losses it created, many of these traders went to start their own hedge funds, where they would use the same trading strategies they had used at banks. They made themselves and their investors good money in bull markets, and when the tide turned, they’d close up shop, hide out a couple years, then open a new fund employing the same strategy under a new name.
Sales and trading doesn’t typically recruit MBA students. Business schools teach accounting and corporate finance, not how to make big bets based on tidbits of information and intuition. When the chairman of the Fed farts, traders can sniff out the implications. When Melania slaps away Trump’s hand, it implies political turmoil in the US, interest rates spike, oil plummets—“Go long, frontier markets,” say the traders. And while they might err in their long and short calls, a quick analysis of a bank’s trading floor can be a good litmus test for a bubble in the financial markets—if over half of the seniors on college lacrosse teams have sales and trading jobs lined up, it’s probably time to bury your USD under the mattress.
Research
Research analysts9 spend their time combing through publicly available information to provide views on a given company’s stock (equity analyst) or debt (credit analyst). Their research is then used to help inform (and misinform) investors on how a particular company’s financial instrument is trading in the market. They do the legwork, then it’s up to the sales and traders to push those views on clients. Each bank has a lead research analyst for an industry—someone covers media companies, another covers industrial companies, and so forth. These analysts only cover securities that are publicly traded. For equities, that means the company has sold a portion of its stock to the public market and thus must file quarterly and annual financial reports. Some companies may choose to keep their equity private but will issue public debt, in which case they are required in many instances to publish their financials too. But with tens of thousands of publicly traded securities, how do banks choose which companies they will cover? The big-name companies will be covered out of necessity, but often, if a bank advised a company on its IPO, there will be an understanding that the bank’s equity research analyst will then cover that company (and issue a STRONG BUY). Who in a bank works on executing these IPOs, debt issuances, and other transactions?
Corporate Finance
Corporate finance people are companies’ trusted advisors. Of the three divisions, corporate finance is on the private side of the “Chinese Wall,” meaning that it has access to material private information that the public side of the investment bank (sales and trading and research) does not, or at least should not. Corporate finance bankers advise companies and their management teams on all types of transactions: raising capital (debt and equity) for companies; advising companies on both mergers and acquisitions (M&A); and overall strategy and shareholder relations. There’s other stuff too—keep reading.
