Types of Investors

Businesses secure capital from different types of investors to fund operations, expansions, and more. Pre-investors, passive investors, and active investors are the three primary categories of investors in a business. Pre-investors are not professional investors, while active and passive investors are professional investors who command varying degrees of involvement in the business’s operations.

In this article, we shed light on the different types of investors in the market and explain the different investment instruments where they park their capital.

An investor is an individual or an organisation that invests capital into a business or asset with the expectation of earning returns on the investment. Different types of investors invest their funds in different types of financial instruments like stocks, bonds, mutual funds, ETFs, foreign exchange, gold, silver, and real estate. Investing in different instruments helps them earn returns to accomplish various financial goals like wealth accumulation, funding the child’s college education, and building a retirement corpus. Investors' willingness to accept investment risks can vary depending on their goals, time horizon, and return expectations.

• Investors invest their funds in different financial instruments like stocks, bonds, mutual funds, ETFs, and real estate to earn returns and achieve their financial goals.
• Unlike traders, investors take a long-term strategic position in companies.
• Different types of investors can be classified on whether they manage their portfolios actively or passively. Active investors aim to beat the benchmark index, while passive investors aim to track the index and generate similar returns.
• Investors can also be categorised on the basis of their risk tolerance levels and investment styles. 

Apart from varying investment approaches, investors also differ in terms of their risk appetite, investment styles, and time frames. For instance, depending on the risk investors are willing to take, they can be classified as conservative, moderate, and aggressive. The risk appetite of investors determines their investment choices. Investors who prioritise relatively low returns but steady gains and capital safety tend to invest in risk-free options like FDs or low-risk investment options like government bonds. Similarly, investors with an aggressive risk appetite tend to value capital appreciation and higher returns over pure capital protection. Therefore, they are more willing to take on additional risks and invest in assets like equities and currencies that have a higher return potential. The categories of investors between these two extremes prefer a moderate investment style to balance risk and returns.

Different types of investors use varying investment strategies to maximise returns while minimising risk exposure. Based on their respective investment strategies, investors can be broadly classified into active and passive investor classes. Active investors are investors who conduct thorough research and analyse market trends to invest and trade, while passive investors build a diversified portfolio that mirrors a leading market index.

Active investors trade frequently to take advantage of short-term market fluctuations with an aim to outperform the market and generate better returns. Passive investors, on the other hand, buy and hold investments with a long-term approach to match market returns with minimum effort. While active investors buy and sell individual securities like equity stocks, passive investors generally invest in mutual funds and ETFs. It is important to note that the choice between active and passive investment strategies depends entirely on the investor’s goals, risk appetite, market knowledge, and preferences.

The financial market is composed of different types of investors. Here’s a quick break-down of the common investor categories you can find in the market:

Angel investors

Angel investors are high-net-worth individuals who invest capital into start-ups in exchange for equity stakes in the company. Angel investors can provide capital either once or on an ongoing basis. Angel investors are generally experienced investors or industry professionals who can also offer valuable expertise, guidance, and mentorship to the start-up company. Since this type of investing happens at the nascent stage of the business, angel investing involves a high risk quotient as well.

Venture capitalists

Venture capitalists or VC investors are private equity investors who usually invest in early-stage companies with high growth and good revenue generation potential. They receive an equity stake in the company in exchange for the capital invested and remain invested in the company until it attains a significant market position. They then sell their stake for a profit. Venture capital firms pool money from different investors, companies, and funds to invest in companies. Based on the stage at which the firm invests in the said company, VC funding can be classified into different categories: start-up, seed, expansion, and bridge.

P2P lending

Peer-to-peer lending, or P2P lending, is a type of financing in which the loan amount is secured from other individual investors. Instead of traditional financial middlemen like banks, the P2P platform acts as the intermediary in such cases. Through P2P lending, small businesses can raise capital at potentially lower interest rates while investors benefit from higher returns.

Personal investors

A personal investor is an individual investing their own funds in various investment vehicles like stocks, bonds, mutual funds, and ETFs to achieve their own financial goals. These investors are often called retail investors. They aim to invest in money markets to attain potentially better returns than traditional instruments like FDs and RDs. Most personal investors invest in a variety of assets to build a diversified portfolio for maximised returns.

Institutional investors

Institutional investors are yet another common type of investor you will come across in the stock market. These investors are organisations that pool funds from different people and invest the same in various market-linked instruments like stocks, bonds, and MFs on their behalf.  Common examples of institutional investors include mutual fund houses, hedge funds, ETFs, and insurance companies. Since institutional investors invest pooled funds from various investors and entities, they can usually trade in large blocks of securities, impacting the security’s market price.

When it comes to a business, there are primarily three types of investors: pre-investors, active investors, and passive investors. Pre-investors are family and friends who usually commit a small amount of capital to the business as an initial source of funding. Active investors are those who commit capital to the business and take a hands-on approach to its management. In other words, active investors are actively involved in the decision-making process, like ideating strategies, appointing senior management, etc. Private equity firms and VCs are common examples of active investors. Passive investors are professional investors who commit capital to the business but do not play an active role in the day-to-day management of the business. 

When it comes to the actual investment question, investors have a wide variety of options. They can choose from a wide array of assets based on their investment objectives, investment period, and risk appetites. Different types of investors can invest in the following asset classes and earn returns:

Stocks

Various categories of investors can invest in stocks of publicly traded companies through recognised stock exchanges. Investing in the equity shares of a company confers ownership rights on the investor. Additionally, investors can earn returns from capital appreciation and dividend income (if any).

Bonds

Bonds are debt securities issued by companies and governments to raise capital from investors. By purchasing bonds, investors lend money to the issuer and receive interest on the lent sum. The principal sum is due on the maturity date of the bond in question. While bond prices depend on the prevalent interest rate in the market, investors can earn steady returns from these fixed-income assets and enjoy relative capital protection compared to equity investments.

Real estate

Apart from purchasing physical property directly, different types of investors can invest in real estate through REITs (Real Estate Investment Trusts). REITs are firms that own or manage income-producing real estate. Investing in REITs allows investors to invest in high-value real estate.

Mutual funds

Mutual fund schemes pool money from different investors and invest the same in stocks, bonds, and other assets. These funds are managed by professional fund managers who decide on asset allocation according to the scheme’s objective. Mutual fund investments cater to different types of investors with varying risk appetites and return expectations. For instance, low-risk investors seeking steady returns can opt for debt funds, while high-risk investors seeking high returns can invest in equity-focused funds. Investors can use mutual fund calculator tools online to estimate returns and invest accordingly.

Exchange-traded funds (ETFs)

ETFs are marketable baskets of securities like stocks, bonds, and other assets that track a particular index like BSE Sensex. When investors buy units of an ETF, they purchase units of a portfolio that tracks the return and yield of the underlying index. ETFs aim to replicate the performance of the underlying index rather than trying to outperform it. It is easy for investors to invest and trade in ETFs since they trade directly on the stock exchange, much like individual stocks. ETFs are perfect for categories of investors seeking passive investment with good diversification.  

Commodities

Commodity trading is the buying and selling of various commodities like gold, silver, oil, and sugar on the commodity market. In India, commodity trading is primarily done through derivative contracts where investors can profit from changes in the prices of the underlying commodity without actually possessing the commodity. Commodity trading is perfect for certain types of investors who have the required expertise and market knowledge about the commodity’s market.

Alternative investments

Apart from the investment instruments listed above, investors can also park their funds in alternative investments. Common alternative investments include private equity, hedge funds, cryptocurrencies, collectibles and art. Risk-averse investors can also consider conventional risk-free options like fixed deposits and safe haven assets like gold. 

In summary, an investor is an individual or entity that invests funds in various assets with the aim of earning returns. There are different types of investors in the financial markets, varying primarily based on their investment strategy. Investors can commit their capital to different assets, including stocks, bonds, mutual funds, and real estate, depending on their risk tolerance capacity and return expectations.

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