Classification of players by supply and demand for capital
As the capital market is the place where the supply of capital, provided by investors, meets demand, coming from issuers, as an initial approach capital market players can be broken down into the following three main categories:
With regard to the role played by intermediaries, that of facilitating contact between investors and issuers, economic theory distinguishes between financing provided through bank loans, so-called "intermediated" financing, to financing through the issuance of securities, "disintermediated" financing.
In the first case (intermediated financing), the resources of agents with a financing capacity (deposits, in particular from households) are made available via banks to agents with financing requirements (companies). The crucial role of banks in this regard is to enable the short-term time horizon of the first group to be transformed into the long-term time horizon (investment) of the latter.
In the second case, agents with financing requirements capture public savings directly through the issuance of securities (stocks and bonds), which are acquired by agents with financing capacity. The description "disintermediated" used for this form of financing is somewhat misleading as intermediaries operating in this second situation are in fact more numerous and diverse than in the previous case, and once again the banks play a central role!
Classification of players by supply and demand for financial products
From the standpoint of the players themselves, the dichotomy is more in terms of supply and demand for financial products. One refers to the "sell-side" and the "buy-side". The sell-side comprises players that originate the products: investment banks which evaluate them through the work of financial analysts, and those that distribute the products, the brokers. The sell-side therefore aims to capture investments and works on behalf of issuers. This category of player is behind financial innovation and remunerates itself through commissions or margins on the transactions it originates.
The "buy side" comprises players that are prepared to buy these same products: pension funds, mutual funds, insurance companies and hedge funds. The buy-side therefore represents investors who wish to build up a portfolio of assets, increase its value and who are remunerated from this activity.
This distinction, more technical, but in common use among professionals, has the disadvantage of focusing very little on the issuers themselves. Furthermore it can generate confusion for the neophyte as the "sell-side" is often represented by so-called "investment" banks, which given the definitions presented above, ought to be on the other side!
In reality, investment banks work on both sides of the divide. They are at the origin of the issuance of financial products, but also acquire such investments in the context of managing their equity capital. This is why, to avoid conflicts of interest detrimental to customers, investment banks are required to create "Chinese walls" between their buy-side and sell-side activities.
A wide range of roles assumed by versatile players
As we have begun to see, it will often be impossible to place an institution within a specific category. Ultimately, a universal bank operates everywhere at the same time: it issues securities to cover its own financing needs, assists companies in obtaining financing, or finances them directly via loans or investments. Through the provision of means of payment, the keeping of securities and cash accounts, or through its brokerage or asset management subsidiaries, it plays an essential intermediary role in financial markets.
This is why on fimarkets we will be emphasising well-defined "roles", recognizing that a "player" can often play several roles depending on the particular situation. However the presentation will always focus on financial markets as a whole. Roles exercised within each institution will be dealt with in another section of the site devoted to "functions".
- On the difference between "Buy-Side" and "Sell-Side": see this article in Investopedia