Careers in the Capital Market, an Insider’s Perspective

This article was originally published in Carey The Torch blog on 15 January 2019.

Recently, I had a chat with a fellow student over coffee about our experience in school and plans for the future. She inquired about careers in the capital market and wanted to hear my story, knowing that I have experience in the field.

I told her that I started my career in the Indonesian capital market through a management trainee program at an Indonesian state-owned investment bank. My first experience was with a “sell-side” company but I later moved to a “buy-side” company prior to my graduate study at the Johns Hopkins Carey Business School.

With a career that spans some 10 years in the capital market, I would like to elaborate on three main points: “sell-side” and “buy-side”, debt and equity, and front, middle, and back offices.

Sell-Side and Buy-Side

Knowing that there are two sides to the capital market will give you an immediate understanding of how capital markets work, and more importantly, how you can map your career path. Both sides provide an intermediary function in connecting the capital surplus unit (the investor) and the capital deficit unit (the corporation and the government), but also have notable differences.

• Sell-side deals with raising new investments, trading securities (stocks and bonds), and providing financial advisory. Buy-side deals with investing money, on behalf of its owners, in the securities.

• Sell-side gets compensated based on the number and size of transactions generated, while the “buy-side” gets compensated based on the amount and length of funds under management. Consequently, compensation and work-life balance, for the most part, follow that arrangement. Sell-side is transaction-based while the buy-side is fund accumulation-based.

• Sell-side companies include investment banks, securities brokerage, and financial advisory. Buy-side companies are more varied and include investment management, pension funds, insurance companies, endowments, hedge funds, sovereign wealth funds, family offices, and other institutional investors.

To make it clearer, you can refer to the following diagram of cash investment flow:

Debt and Equity

Raising funds for a company’s investment needs comes from the right side of its balance sheet, which may be in the form of debt or equity. An investment bank helps a company raise funds through underwriting the associated securities in the primary market. The Buy-Side subscribes to the securities in the primary market and can later sell those securities in the secondary market. Secondary market trading is facilitated by the sell side (brokerage).

Characteristics of either debt or equity determine the risk tolerance and profile of both the issuer and the investor. However, they also determine the type of associated careers including their required skill sets and profile characters. Higher risk, higher return equity attracts higher octane and faster-paced deal makers. Conservative types tend to flock into the debt market. The debt market size is roughly close to double the equity market size. In general, debt transactions and debt funds are more substantial in volume, but they do not necessarily correspond with a higher compensation career path, as compensation is a function of expected return. The higher return can be generated to the investor, the higher compensation one can demand.

Front Office, Middle Office, and Back Office

The front office can be defined as the client-facing part of the business including the provision of direct service to the client. The back office includes operational aspects behind the scene. The middle office is situated between the two and is more difficult to define, but they are generally the support functions that may not be directly involved in an investment transaction yet necessary for the overall working of the company.

Core functions (or the heart) of the business of either the sell or buy-side is in the front office. On the sell side, this function includes merger & acquisition, securities sales & trading, securities research, and financial advisory. On the buy-side, it includes portfolio management, securities research, and fund marketing. Front office work usually provides more competitive compensation and better recognition in terms of career paths.

The back office is crucial to the functioning of both sides. Transactions are settled and payments are processed by the back office. Other functions may be in the back or middle office, depending on how directly those functions support the client-interfacing front office. Those functions include human resources, information technology, risk management, and compliance. In a highly and increasingly regulated capital market sector, compliance becomes a highly demanded position.

I have had the fortune of getting exposure to both sides of the capital market in multiple functions (research, business development, risk management, compliance, investment management, and product development). I think the capital market is an exciting field and it has provided me with a rewarding career. However, I have grown my passion for investment and interest in alternative assets, which has led me in a different direction.

I hope my insider perspective on the capital market career has provided you with insights to help you with your career decision-making. Should you require additional information, I find the Vault Career Guides to be most insightful and Carey students have free access to them. Another resource, Wall Street Oasis, can give you the grapevine discussion over the capital market career.

As for my friend and I, we talked about the impact-investing field for the rest of our meeting, but that is for another post.