An investor is any person or entity, like a firm or mutual fund, who commits capital with the expectation of receiving financial returns.
Individuals use investments in order to increase their money and/or provide an income in the future. For individual investors, known as retail investors, there is an extensive assortment of investment options, including stocks, bonds, commodities, mutual funds, exchange-traded funds, fine art, and real estate.
Institutional investors, such as mutual funds, pension funds, foundations, or insurance companies, have an even wider variety of investments available to choose from as they typically have a much greater amount of funds to invest.
How Investors Work
Typically, an investor puts capital to use for long-term gain, while a trader tries to earn short-term profits by buying and selling securities over and over again. An investor uses a broker to access markets and has a brokerage account with the broker.
Technology has made it increasingly easy and inexpensive to open and maintain a brokerage account and for brokers to provide information to investors.
Three Types of Investors
Regardless of their investment choices, the world of retail investing is inhabited by three distinct types of investors:
Before anyone makes their first investment, they fall into this category. Simply by staying out of the action, you define your place in it. Non-investors typically focus on goals of saving and earning.
A passive investor invests for the long haul. Passive investors limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest. The strategy requires a buy-and-hold mentality, maintaining resistance toward the temptation to react or anticipate the stock market’s every next move.
An active investor takes a hands-on approach and actively trades to improve portfolio performance. The goal of active money management is to take full advantage of short-term price changes and thus to do better than a markets’ average returns. Active investors may personally manage trading, or use an advisor/manager, or a robo advisor, which bases investment decisions on an algorithm determined by the investors’ preferences and characteristics.
An angel investor is an affluent individual or group of individuals who provide capital for a business start-up, usually in exchange for ownership equity. Angel investors usually give support to start-ups very early in a project when risks of the start-ups failing are relatively high and when most investors are not prepared to back them.
Institutional investors are organizations such as foundations, insurance companies, pension funds, or mutual funds that invest in stocks and other financial products and have sizable portfolios. There’s strength in numbers, and because of this, institutional investors often have far greater market power and influence than individual investors.
Why Investors Matter
When you think about investing in terms of compounding and time, it’s easy to understand why people would risk their money for a potential return. The returns that you earn on money can be compounded, and then they start to earn returns, too. When you give your money plenty of time to compound, the growth can become exponential.
Be it an individual or an institution, the power of investing is attractive.