Part 4 – Asset Management (AMC) – Buy Side And Sell Side Of An Investment Bank

Let’s look at the asset management company in a bit more detail Now let us understand the meaning of an Asset Management Company (AMC) in this regard

So while we have discussed research on one side, we said that the research may have different kinds of clients One could be the individual investors, the other one could be institutional investors and Asset Management Companies can be classified as one of the institutional investors So what do they exactly do? So institutional investors like Asset Management Company what they do is they basically invest pooled of funds of clients into various securities Securities can be bond securities or company based securities ie

stock equity based securities So Asset Management Company essentially collects money from the public and makes it as a pool of funds So may be 100 million dollar fund or may be 200 million or multi billion fund So depending on the size of the Mandate they invest the pooled funds of clients into various securities and an example could be an Asset Management Company could be like a Mutual Fund So a Mutual Fund that invests into technology stocks

So obviously you and I as an investor invest in a Mutual Fund of one of the companies that Mutual Fund will be managed by a portfolio manager here So there is a portfolio manager who directs these pooled funds into various securities So let’s see what this job is all about you know how do they make money? They make money by actually you know taking a commission or fees depending on the size of the fund that they are managing So if it is 100 million funds for example, management fee may be around 2% – 3% of the overall asset under management or AUM So that’s how the asset management companies make money and the manager who manages the investments or takes investment decisions is called a portfolio manager or a fund manager ok and the important part of this Asset Management or the Asset Management Companies is that they provide lot of diversification because they have larger pool of resources as compare to the individual investors

So I may invest in only Microsoft or may be Google You know the Mutual Funds who invest into technology stocks may provide more diversification because they have larger funds to invest across domains and they are professionals, they can do lot of risk return analysis and kind of diversify their large portfolio which will in return ultimately mitigate my investment in the Mutual Fund So that’s how basically the Asset Management Company actually works And with this let’s come to the deferent between what is a buy side and what is sell side Many a times I have seen students confusing between what is a buy side and what is a sell side and why they are kind of used in this context of investment banking

When we had earlier talked about investment banking we said that the investment banking has a research division as well as the sales and the trading division so think about research division who is preparing research and advice So research and advice for whom? So research and advice for clients like institutional clients, investors who can individually investors So were saying that the investment bank research department will produce research that will be consumed by clients So the clients would be institutional and individual investors So whenever you see this report you about a buy-sell recommendation from a brokerage firm think of this as a sell side, because what they are doing is essentially selling ideas ok so they are not selling a reports so please not there could be some neutral brokerage firms, independent brokerage firms who sell reports as well as price tag but when we talk about sell side in the context of investment banking they sell ideas ok

So they are selling ideas to the clients and in most cases these ideas are communicated for free So that’s how a sell side comes, the selling ideas ok Think about a buy side, buy side is nothing but the client who are on the institutional side So one side is a sell side selling ideas, selling ideas to whom? To the clients and the clients are called as buy side because what they essentially do is that they have a pool of funds, they invest in stocks and bonds So a buy sides they are the one who are buying stocks and bonds and they do that in large quantities of securities for money management purposes

So they have a Mandate and they invest as per their Mandate So who are the examples of a buy side? So let’s look at a couple of them Hedge Funds, Mutual Funds, Insurance Companies, Pension Funds to name a few are actually buy side because if you look at individually Hedge Funds, Mutual Funds in every place you will find a fund manager who will interact with the brokerage firms for ideas So brokerage firm is giving ideas to Mutual Funds Mutual Fund is hearing those ideas they may be appreciating those ideas and looking forward to making investments

So whose portfolios are these companies actually managing on the buy side managing they are basically the clients So investor Mutual Funds is a pool of funds from their own investors So that’s why they are called as a Buy side because they invest in stocks and bonds ok I hope with this your able to understand pretty much basic functionality of research how do they make money what are the client who are the EMCs and what is the difference between by side and a sell side

Source: Youtube

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