Sell-side, buy-side and activist short-seller research
Sell-side research is published for a bank's or broker's clients: broad, standardized, regulated and rarely negative. Buy-side research stays inside an asset manager: customized, often proprietary and largely unconstrained, aimed at stocks that pass its screens. Activist short sellers are a buy-side exception: they publish to push a price down.
Before this: Equity research reports: contents, ratings and price targets
On the exam
- Compare sell-side and buy-side equity analyst reports and their conclusions
Compare sell-side and buy-side equity analyst reports and their conclusions. Expect: audience, customization and regulation of each; why sell-side analysts rarely say sell; what a stock screen is for and where thresholds go wrong; when and why activist short sellers publish.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
What is the difference between sell-side and buy-side research?
The elements of a report are the same on both sides, as the previous lesson showed. The analyst’s seat is not. A sell-side research report is written for wider distribution among external users, often by the firm that underwrites a company’s securities. A buy-side research report is written inside an asset manager to support its own decisions.
| Feature | Sell-side research | Buy-side research |
|---|---|---|
| Written by | analysts at investment banks and brokers | analysts at asset managers and funds |
| Audience | external clients: institutional and retail investors, traders | internal investment teams and portfolio managers |
| Objective | research and recommendations for the firm’s clients | support the firm’s own buy, hold and sell decisions |
| Depth | broad coverage of many stocks and industries, standardized formats | in depth, focused on stocks or sectors that fit the firm’s strategy |
| Valuation | commonly accepted models (discounted cash flow (DCF), multiples), with emphasis on earnings forecasts | may use proprietary models suited to the type of company |
| Detail | more general, for a broad audience | customized for internal decisions |
| Regulation | restricted because of the firm’s ties to covered companies and investment banking clients | largely unconstrained: used internally, not published |
| Published? | yes, widely; often quoted in the press | no, confidential |
- Sell side Memorize banks and brokers; published for clients
- Initiating coverage and periodic reports standardized
- Consensus aggregated forecasts
-
- Buy side Memorize asset managers; confidential
- Investment committee reports decide and monitor
- Activist short sellers Use it publish after limited partners
-
Why does the sell side publish research, and what limits it?
Memorize
Investment banks use research to support underwriting and issuing securities, corporate advisory relationships and broker-dealer trading for clients. Teams cover a sector, and analysts often come from the industry they cover.
Because the bank also earns fees from the companies being rated, rules limit what its analysts can do:
- Research is separated from underwriting and trading, so that recommendations stay objective and bankers chasing deals cannot lean on the analyst who rates the company.
- Analysts cannot receive material nonpublic information (for example a pending merger or a planned share issue that the bankers know about) unless it is made public. See Standard II(A).
- They are restricted from publishing for a period around an initial public offering (IPO) or a secondary offering the firm is involved in.
- In the European Union (EU), the second Markets in Financial Instruments Directive (MiFID II) requires asset managers to pay for sell-side research separately from trade execution. This research unbundling pulls research further away from trading.
Unless clients pay for it directly, research as a cost center earns no revenue, so firms choose which industries to cover, how many companies and what kind. Trading commissions are one source of revenue, so coverage tends to follow expected trading volume. Hedge funds are heavy users of research, and brokers use reports on stocks those clients care about to win trades.
Issuers want coverage too. Strong coverage gives investors more information, reduces information asymmetry and attracts institutional investors, and coverage by one or more major underwriters signals credibility.
Data providers aggregate sell-side forecasts (earnings per share (EPS), revenue, margins) into a consensus , with the number of analysts behind each figure. Buy-side analysts use it to see what the market expects and to benchmark their own forecasts. Check what each number measures: an adjusted EPS consensus and a consensus on generally accepted accounting principles (GAAP) can differ and come from different numbers of analysts.
Why are sell ratings rare?
Use it
Sell-side analysts are reluctant to issue sell recommendations. A sell can trigger negative trading sentiment, harm relations with the company’s management and put the firm’s investment banking business with that company at risk. That conflict of interest is why the sell side faces more regulation than the buy side. Regulators do not forbid sell ratings. The pressure is commercial and personal.
Reputation matters too. A contrarian view , one that runs against the consensus, is public, and an analyst who rejects the consensus and is wrong pays for it, so it takes high conviction. Ratings often change between buy and hold, and only sometimes to sell.
Exam tip The buy side reads sell-side research for its detail but does not have to follow its recommendations.
How does buy-side research work?
Buy-side research is confidential and goes only to the firm’s decision makers. Investment committees use the reports to support decisions and to monitor positions already held, so the research supports buying, holding and selling.
Unlike the sell side, which tends to cover larger companies with heavy trading, the buy side can research smaller stocks that receive little institutional attention when they fit its strategy.
How does stock screening work?
Use it
Stock screening is a multistep process that narrows a universe to a small number of stocks that fit the strategy, so each can be researched in enough detail. Its purpose is to focus research resources. It reduces the universe. It comes before valuation and does not make valuations more accurate.
- 1. Universe Use it for example an index
- 2. Primary criteria Use it fit the strategy
- 3. Secondary metrics Use it sharpen the fit
- 4. Refine Use it until each survivor can be researched
The drawback is that fixed thresholds are arbitrary and can drop attractive candidates. Rank ordering each criterion, with weights, is an alternative that keeps near misses in view.
What do activist short sellers do?
Use it
Buy-side research supports buying, holding and selling. An activist short seller researches stocks it expects to fall significantly, usually because of misinformation or fraud that the price does not yet reflect.
Unlike normal buy-side work, the research does not stay private. It goes first to the firm’s limited partners (the investors in its fund) and then to the public. Publishing widely aims to change the consensus and the share price, and to attract new clients. Such firms are usually small.
One example: Hindenburg Research, a small research firm, published research in 2020 alleging fraud at the electric-vehicle start-up Nikola. The US Securities and Exchange Commission (SEC) investigated, Nikola’s founder was later convicted of securities fraud, and Hindenburg closed in January 2025.
Contrarian research like this helps markets find the right price, as the next lesson shows.
Now compare the three kinds of research side by side, run the screen yourself and name the author of eight short descriptions.
What makes a report effective?
Whichever side writes it, research should meet high analytical and ethical standards. Good writing cannot rescue poor analysis, but poor writing can undermine good analysis. An effective report:
- contains timely information;
- is written in clear, incisive language;
- is objective and well researched, with key assumptions clearly identified;
- separates facts from opinions;
- has analysis, forecasts, valuation and a recommendation that are internally consistent;
- gives enough information for a reader to critique the valuation;
- states the key risks of investing in the company;
- discloses any potential conflicts of interest the analyst faces (see Standard VI(A) and independence and objectivity).
Memorize this
MemorizeSell side vs buy side
| Sell side | Buy side | |
|---|---|---|
| Audience | external clients | internal teams, portfolio managers |
| Depth | broad, standardized | in depth, strategy-focused |
| Models | accepted (discounted cash flow, multiples), earnings focus | may be proprietary |
| Detail | general | customized |
| Regulation | restricted: separated from banking, no material nonpublic information, limits around offerings, second Markets in Financial Instruments Directive (MiFID II) | largely unconstrained |
| Ratings | sells are rare | any |
Memory hook Sell side sells research to clients, so it is public and policed; buy side buys stocks for itself, so it is private and free.
Know it cold Activist short sellers: buy-side research made public, after the limited partners.
MemorizeScreens and the effective report
| Item | Remember |
|---|---|
| Screen steps | universe → primary criteria → secondary metrics → refine |
| Screen purpose | focus research on stocks that fit the strategy (shrinks the universe) |
| Screen drawback | arbitrary thresholds drop good candidates; fix: rank ordering with weights |
| Effective report | timely, clear, objective, facts vs opinions, consistent, critiquable, risks, conflicts disclosed |
Memory hook Eight marks of a good report: Time, Talk, Truth, Tell facts, Tie together, Testable, Threats, Ties disclosed.
Know it cold Sell ratings are rare because of banking ties, management access and negative sentiment.
- Sell side Memorize banks and brokers; published for clients
- Initiating coverage and periodic reports standardized
- Consensus aggregated forecasts
-
- Buy side Memorize asset managers; confidential
- Investment committee reports decide and monitor
- Activist short sellers Use it publish after limited partners
-
- 1. Universe Use it for example an index
- 2. Primary criteria Use it fit the strategy
- 3. Secondary metrics Use it sharpen the fit
- 4. Refine Use it until each survivor can be researched
How it is asked
-
Audience
A buy-side report is most likely written for…
Internal investment teams. Traps: external clients, high-net-worth individuals.
-
Why few sells
Why might a sell-side analyst avoid a sell rating?
It can damage the bank's relationship with the company. The trap is "regulators forbid it".
-
Screen result
Keep stocks at or above average return on equity and at or below average debt.
Compute both averages, then test each stock on both. The trap is the stock that wins on one test only.
-
Activist sequence
When does an activist short seller publish?
After its limited partners have the research. The trap is "only once fraud is proven".
Exam traps
- Calling buy-side research more regulated. It is the sell side that is constrained, because of its conflicts of interest.
- Thinking regulators forbid sell ratings. Analysts avoid them for business and reputational reasons.
- Thinking a screen improves valuations. It only decides which stocks get researched.
- Treating fixed thresholds as neutral. A stock can miss one cut-off and still be the best candidate.
- Assuming all buy-side research stays private. Activist short sellers publish theirs.
Checkpoint
3 exam-style questions. About 90 seconds each.
1Compared with a sell-side analyst at an investment bank, a buy-side analyst at an asset manager is most likely to:
2An analyst screens five stocks, keeping those with return on equity (ROE) at or above the group average and debt-to-equity at or below the group average. Stock 1: ROE 9%, debt-to-equity 0.40. Stock 2: ROE 15%, debt-to-equity 0.90. Stock 3: ROE 12%, debt-to-equity 0.50. Stock 4: ROE 6%, debt-to-equity 0.20. Stock 5: ROE 13%, debt-to-equity 0.75. The stock that passes the screen is:
3An investment firm that holds a short position in a company sends its investors a report alleging that the company booked sales to customers that do not exist. A week later it posts the report online. The most likely reason for posting it is to:
Key takeaways
- Sell side: published for clients, broad and standardized, constrained by its ties to investment banking; sell ratings are rare.
- Buy side: confidential, customized, often proprietary; free to research small, little-covered stocks.
- Stock screens narrow a universe to a researchable few; fixed thresholds can drop the best candidate, so rank ordering helps.
- Activist short sellers are buy-side researchers who publish, after their limited partners, to push a price down.
Questions about this lesson?
Where this comes back
- Why two analysts using the same model get different values Equity Research Reports
- Standard II(A): Material Nonpublic Information Guidance for Standard II: Integrity of Capital Markets
Questions candidates ask
What is the difference between sell-side and buy-side research?
Sell-side research is written by banks and brokers for their clients and published widely; it is standardized and regulated. Buy-side research is written inside asset managers for their own decisions; it is confidential, customized and largely unconstrained.
Why do sell-side analysts rarely issue sell ratings?
A sell can upset the company's management, put the bank's investment banking business with that company at risk and trigger negative sentiment. Going against the consensus in public also risks the analyst's reputation.
What do activist short sellers do?
They research companies they expect to fall sharply, often because of misinformation or fraud, share the research with their own investors, then publish it to move the consensus and the price.
What is the drawback of a stock screen?
Fixed cut-offs are arbitrary: a stock that narrowly misses one can be the most attractive. Ranking stocks on each criterion and combining the ranks keeps such near misses in view.
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