What Works to Sell Your Side

Entrepreneurs and established firms alike need funding. Now how do investors get to know of likely good returns or avoid potential bad investments? Through sell-side firms. Notably, while marketing their services, these firms end up influencing IPOs, secondary markets, and even institutional investor decisions. This is attributed to thorough, impactful research presented via concise reporting in compliance with regulations. Despite the significance, sell-side firms spend millions of dollars on research, but distribute reports for free. So why go through such trouble?

First, let’s touch base. The sell side typically constitutes brokerage firms that recommend stocks to the buy side, primarily institutional investors. Analysts covering the particular stock/sector report company/sector initiations; news having short-term impact (pre-/post-conferences, company announcements, earnings seasons); or events with long-term outlook (government regulations, mergers/acquisitions).

Commonalities in sell-side reports include:

  • Ratings (buy, sell, hold) or sector stance (typically in large font to set the tone)
  • Investment summary and justification (based on news, company updates)
  • Financial summary and market/competition trends (help in valuations)
  • Environment, Social, and Governance (ESG) reporting (recent trend)

Clarity and brevity are the key, backed by data from reliable sources. Interestingly, numbers (e.g., revenue, percent growth) take precedence over throwaway words (e.g., robust, decent), though the reports are essentially a sales pitch. With all this toiling, sell-side analysts need to ensure independent and unbiased reporting as per International Financial Reporting Standards and other country-specific regulations.

Adding to the above, the sell side is a highly competitive industry with a mix of old (Fitch, S&P) and new (Bloomberg) firms, all having most stocks under coverage. No investor wants to read similar views of a stock from different firms. Thus, the lifetime of sell-side reports is short, which adds pressure on analysts to be the early birds.

Why does the sell side go through such drudgery for free? Clearly, the brokerage more than compensates for the effort. Most countries do not fix brokerage commissions, which helps sell-side firms compete aggressively to maximize returns. The following strategies work well for popular sell-side firms.

Advanced financial modeling – It is not a coincidence to see opinions like ‘nearly missed our projections’ or ‘slightly exceeded our expectations’. Technological advancements complement hands-on operational insights to improve forecast accuracy. This, in turn, builds trust among the buy side.

Regional knowhow – For a particular stock, sell-side analysts must develop forecasts built on several perspectives, including workforce dynamics and government regulations. Being at the stock’s region of listing helps in gaining better insights. This often becomes a factor in assigning a ‘Buy’ or ‘Hold’ call for the same stock by different brokerages.

Presentation – This is often considered a cost burden. However, for a sales pitch, attractive presentation of a report may help close the deal. Most sell-side firms employ in-house editorial and graphics/desktop publishing teams for proprietary designs and structuring.

Markets may or may not be, but financial literacy is in an upswing globally. Also, new ventures, particularly carbon credits and cryptocurrency, are piling on the treasure. Thus, the sell side isn’t going anywhere. Accountability will likely increase but would not hamper the impact of sell-side reporting.