A sell side firm makes its living processing transactions for investment banks, buy side firms, publicly traded companies,other institutional investors and retail investors. The firms typically earns a commission for handling such transactions. Thus it's in their best interest to generate churn, as the more transactions they handle the more money they make. An example of a sell side firm would be the brokerage houses most investors are familiar with such as UBS and Merrill Lynch.
Sell side firms also have an inherent conflict of interest in that the subject of many of their research reports are in many cases also their clients. It's not uncommon for companies to pressure sell side firms to publish positive research, whether by threatening to move their business to a competing firm or threatening to withhold information from their analysts. This can lead to some significant overly positive outlooks for the firms in analyst opinion. In the nineties sell side firms were accused of spinning research in favor of their institutional clients and were subsequently charged by New York attorney general Elliot Spitzer.
Importance to Investors
An investor should never take a analyst's opinion as gospel due to the conflicts of interest these analysts face. As noted above analyst's are often pressured by companies to publish positive reports. Analysts of sell side firms have along history (and sometimes sordid) of being overly optimistic in their projections. Analysts also have a reputation for missing downturns in the economy.
Sell side firms do service the retail investor but the institutional investors represent the bulk of their bsuiness, so it's important investors to know that this part of wall street machinery is not intended to necessarily help them. Nonetheless analyst projections are worth noting because they generate the expectations that quarterly earnings are judged upon by the street. An investor should always know what consensus estimates are for his or her stocks, but not consider those projections to necessarily be accurate. "Growth at reasonable price" investors use analyst projections into figuring buy/sell decisions so they need to be especially wary.
Savvy investors, aware of these conflicts of interest, tend to buy independent research when looking for a professional opinion. Independent research houses typically publish reports through subscriptions and charge customers equally so presumably they are not as subject to the whims of their large clients as all are charged the same. Examples of top sources of independent include Value Line, Investor's Business Daily and The Motely Fool.
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