Investor Definition and Main Types of Investors
Do you know nearly 55% of American adults invested money in the stock market in 2020? Investing can be a life-changing profession if you develop appropriate investing behavior, learn proven investing techniques, and hold equities for the long term. Many of the world’s richest people hold shares of multiple companies. For instance, Warren Buffet, the ninth wealthiest person in the world as of January 2023 with a net worth of $109.5 billion, is the best example of how systematic investments in the stock market can change the lives of people.
Considering the staggering growth in the flow of investments into the stock market over the past few years, we, at Traders Union, have created a guide that answers the following questions:
What is an investor?
What is the difference between a private investor and an institutional investor?
What are the main types of investors?
What is the difference between an investor and a trader?
What are the top three brokerage accounts for investors?
What is an Investor?
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property. Investors spend a lot of time analyzing assets from different angles before investing money into them. An investor aims to invest the money in an asset that provides a maximum return at minimum risk. Investors build a portfolio of assets to diversify the risk and earn a return higher than the benchmark indices.
How to start investing: a full beginners guidePrivate vs. Institutional Investors
Depending on various factors, including risk tolerance, availability of capital, investment style, and timeframes, investors are classified into two types:
Private investors
Institutional investors
A private investor is an individual or an organization that invests its own money to generate a good return on the investment. They are the major source of the start-up capital for the businesses. The best example of a private investor is an angel investor.
An institutional investor is a legal entity that pools money from individual investors and invests it into various income-generating financial instruments, including stocks and bonds.
Types of Private Investors
Pre-investor
Pre-investor is an individual who hasn’t yet started investing. He may be learning various investment strategies through paper investment platforms. They may have little capital at their disposal and minimal financial consciousness. This is the best stage for gaining a theoretical understanding of various investment strategies and adopting an appropriate investment behavior.
Passive investor
A passive investor is an individual or a firm that invests money in an asset and leaves it for the long term. Passive investors don’t engage in frequent buying and selling decisions. They do a lot of groundwork analyzing the fundamentals of the stock before making an investment decision. Passive investors can generate huge ROI in the long term if they start building a portfolio of mutual funds, ETFs, stocks, and real estate in the early stage of their career. Passive investors believe in Buy and Hold strategy.
How to buy stocks?Active investor
An active investor is an individual of a firm that makes frequent buying and selling decisions. Active investors closely observe the stock market movements or the factors that could influence individual stocks. They take the advantage of the short-term stock fluctuations to gain returns. Most active investors create a unique investment strategy that perfectly blends the passive and active investing methods. They not only earn market-based passive returns but also skill-based short-term returns from the stock market. Active investors believe in Buy and Sell strategy.
Types of Institutional Investors
Several types of institutional investors are operating in the market. Some of them include insurance companies, banks, hedge funds, speculative funds, pension funds, mutual funds, and others. Institutional investors can exert a significant influence on the movements of individual stocks or the stock market as a whole due to the sheer volume of trades they execute. This is the reason why institutional investors are called market makers.
Investors vs. Traders
Investors and traders are not the same. There are a lot of differences between these two. An investor, as mentioned earlier, focuses on acquiring income-generating assets and holding them for a certain period to earn returns. On the other hand, a trader is an individual that takes the advantage of the price movements of a broader stock market index or an individual stock to gain returns.
The differences between investors and traders are provided below:
| Investors | Traders |
|---|---|
Holds the asset for the long-term |
Aims to capitalize on short-term price movements |
Investors use fundamental analysis before making an investment decision |
Traders use technical analysis that helps to identify support and resistance zones and entry and exit points of the stock |
Investors aim to grow the existing capital |
Traders aim to build capital |
Investors don’t use leverage to generate returns |
Traders use leverage offered by the stockbroker to maximize the return |
The major problem is that the boundaries between trading and investing are not clear. There is no difference between an active investor and a trader if the leverage is not taken into consideration.
Which Type of Investing is Best For Me?
No two individuals follow the same investment style. Depending on the investing experience, risk tolerance, and temperament, every individual would eventually develop his or her unique investment style. However, for most people, the following types of investing are optimal:
Long-term passive investing in stocks
Active investing in stocks
ETFs and index funds
Mutual funds
Real estate
If you are a 23-year-old individual, just starting in your career, you may opt for active investing in stocks with whatever little capital you have in hand. This not only helps you build the capital and understand the nitty-gritty of the stock market. This investing strategy works if you have a high-risk tolerance.
On the other hand, a 23-year old individual with low-risk tolerance can opt for long-term passive investing in stocks. In this case, the investor should adopt a systematic investment strategy wherein a specific amount every month would be invested in quality stock, an ETF, or a mutual fund. This strategy is ideal if your goal is to create a corpus for retirement or any other long-term financial goal. Maybe, you are also interested in information about key differences between stocks and ETFs to determine the right investment for your portfolio.
If you have a huge capital at your disposal, you may look at building a diversified portfolio of real estate, stocks, and mutual funds. This diversification enables the investors to enjoy sufficient liquidity through stock market investments and own a tangible asset that appreciates its value in the long term. A high-risk-tolerance investor with huge capital may also look at investing money in cryptocurrencies like Bitcoin, Ethereum, Litecoin, and Dogecoin.
Top 3 Brokerage Accounts for Investors
An investment account with one of the largest brokers is sufficient for all purposes including passive investing, active investing, cryptocurrency investing, and trading.
Here is the comparison table between the top three brokerage accounts, which include Charles Schwab, Interactive Brokers, and eOptions:
| Broker | Minimum Deposit | Passive Investment Options | Active Investment Options | Stocks Fees | |
|---|---|---|---|---|---|
$0 |
Robo- Investing, ETFs, and IRA |
Stocks and Mutual Funds |
$0 per trade |
||
$0 |
Robo- Investing, ETFs, and IRA |
Stocks and Mutual Funds |
$0 per trade |
||
$0 |
ETFs |
Stocks and Mutual Funds |
$0 per trade |
Interactive Brokers
Interactive Brokers is one of the leading brokerage firms in the world. It is regulated by the UK Financial Regulatory Authority (FCA), the US Securities and Exchange Commission (SEC), the US Financial Industry Regulatory Authority (FINRA). It offers automated portfolio management services wherein an advisor team builds a portfolio on behalf of the investor for an asset-based management fee of 0.12% per annum. This brokerage firm was named the best online broker by Barron’s in 2020. It also gives access to mutual funds replicator that helps to identify low-cost ETFs.
eOptions
eOptions is a no-commission broker suitable for investing in equities and trading in options. This brokerage firm supports stocks, mutual funds, ETFs, and fixed income assets. However, it does not allow trading commodities, futures, options, forex, and cryptocurrencies. eOptions has a cash sweep program that transfers uninvested cash in the brokerage account into the money market fund.
Charles Schwab
Charles Schwab is a leading and reliable commission-free investing platform suitable for active and self-directed investors. It offers the best screeners for mutual funds and ETFs. Investors can make use of 16 mutual fund screeners to select a suitable mutual fund from the pool of 9,800 mutual funds (more than half of these are no-transaction-fee mutual funds). Charles Schwab allows conservative and passive investors to open a retirement account to meet the long-term investment goals.
Summary
On a whole, investing, if done with the help of proven strategies and appropriate investment behavior, can change your life. Investors can be classified into private investors and institutional investors. Depending on your risk tolerance, timeframe, and availability of capital, you can become a passive investor or an active investor. It is advised for beginners to conduct the mock investing by signing up with one of the largest brokers. Mock investing helps investors gain hands-on experience and test the investing strategies. The top three brokerage firms for investors are Interactive Brokers, Charles Schwab, and eOptions.
FAQs
Can I invest in penny stocks?
Penny stocks are considered to be risk investment vehicles. They are likely to be highly volatile and illiquid. You may invest in penny stocks if your risk tolerance is high. People who cannot withstand the volatility should stay away from penny stocks.
Individual stocks vs. ETFs, which should I choose?
If you are a full-time employee who does not have time to analyze individual stocks before making an investment decision, you may better go ahead with ETFs. Since ETFs are managed by a professional fund manager and comprise stocks listed on indices, they can generate reasonably good returns. If you have high-risk tolerance and time to analyze individual stocks, you can choose fundamentally strong individual stocks that can generate handsome returns in the long term.
How much money do I need to start investing?
You can start the investing journey with just $100. You may sign-up with a commission-free broker like Interactive Brokers or Charles Schwab and start purchasing the shares of individual companies you admire.
Is trading risky?
Trading can be risky if you don’t have prior knowledge and experience on how stock trading works. We suggest beginners conduct paper trading before putting the real money at stake. Trading can become a lucrative profession if you learn to conduct technical analysis and execute trading strategies.
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Team that worked on the article
Oleg Tkachenko is an economic analyst and risk manager having more than 14 years of experience in working with systemically important banks, investment companies, and analytical platforms. He has been a Traders Union analyst since 2018. His primary specialties are analysis and prediction of price tendencies in the Forex, stock, commodity, and cryptocurrency markets, as well as the development of trading strategies and individual risk management systems. He also analyzes nonstandard investing markets and studies trading psychology.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.
Olga has extensive experience in writing and editing articles about the specifics of working in the Forex market, cryptocurrency market, stock exchanges and also in the segment of financial investment in general. This level of expertise allows Olga to create unique and comprehensive articles, describing complex investment mechanisms in a simple and accessible way for traders of any level.
Olga’s motto: Do well and you’ll be well!
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.