Types of Investors: Everything you Need to Know

We've come a long way from the early origins of our domestic markets — where merchants used to trade under a banyan tree in Mumbai. It evolved into Asia's first stock exchange, the Bombay Stock Exchange or the BSE. Since then, our financial markets have been rapidly developing.

Who is an Investor?

An investor is any person, firm or legal entity that allocates capital into an enterprise expecting financial gain from it in the future. All investors are in the market for gains. However, markets can be tricky, and losses are a reality in the markets as much as profits. Investors and potential investors can consider the losses (in the short-to-medium term) while pursuing potential gains in the long term.

How do we Classify Investors?

There are various ways of classifying investors.

• As per their legal status into an institution, a public company, a private company or an individual.
• As per their net worth and retail investors.
• As per their outlook, some are bulls — optimistic about the market in the short-to-medium term. Then, some bears are pessimistic about the market in the short-to-medium term.
• Country of origin, domestic or foreign, is another classification.

3 Types of Investor Types by Risk Profile

Due to the volatile nature of markets in the short-to-medium term, investors carry the risk of losses over the short-to-medium term. How investors react to these losses or potential losses tells themselves and us a lot about their intrinsic nature and character. Based on their risk profile, the 3 types of investors are:

1. Risk-averse or Conservative Investors

‍Risk-averse investors avoid high-risk investments and prioritize lower-risk options. They have a low tolerance for risk and prefer investments with lower potential rewards. Examples include short-term and long-term fixed deposits and debt instruments through direct investment or debt mutual funds.

2. Risk-neutral or Moderate Investors

‍Moderate investors have a balanced risk tolerance and appetite, accepting some losses for potential gains. Their expectations for rewards are moderate as well. Examples of investments for moderate investors include a combination of short-term and long-term fixed deposits, debt instruments, equities, balanced mutual funds, and multi-asset mutual funds that invest in debt, equities, and commodities.‍

3. Risk-seeking, Risk-loving or Aggressive Investors

‍Risk-seeking investors actively pursue high-risk investments for potentially higher rewards. They have a high-risk tolerance and appetite, willing to withstand short-to-medium-term losses. Examples include direct investment in equities, equity mutual funds, and equity derivatives like futures and options.

What Kind of Investor are You?

You can perform a risk assessment exercise to understand your risk appetite, risk tolerance and, ultimately, your risk profile. Ask yourself:

• How comfortable are you with withstanding financial losses over the short-to-medium terms?
• How would you react if your investment quickly loses 40% to 45% of its value?
• How many dependents do you have for your income?

Your answers to these questions will lead to your risk profile. Your investments can be according to your investment plan, which considers your goals and risk profile. Now, you can even achieve financial goals with savings and investments.

Key Takeaway

In conclusion, there are different types of investors who have different goals, risk preferences, and strategies. Some investors are conservative, while others are aggressive. Some investors focus on long-term growth, while others seek short-term profits. Some investors use fundamental analysis, while others use technical analysis. No matter what type of investor one is, it is important to have a clear plan, do proper research, and diversify the portfolio. Investing is not a one-size-fits-all activity, but a personal journey that requires patience, discipline, and learning. By understanding the different types of investors, one can find the best fit for their own financial situation and objectives.

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Frequently Asked Questions

1. How do I get ideas from investors who are like me?

Getting ideas from investors whose risk profiles are similar or different from yours — might not be a good idea altogether. You can perform a risk assessment exercise to understand your risk appetite, risk tolerance and, ultimately, your risk profile.

2. How do investors get paid back?

Investors allocate capital to enterprises. The enterprises run their operations, make a profit & distribute amongst their investors. For example: If you have invested in a company's bonds, the company pays interest on the bonds. If you have invested in shares of a company, as the company starts to make money, its share price increases in value in the market.

3. What is a fair percentage for an investor?

There is no fair percentage for an investor as a general blanket rule. The fair percentage for an investor depends upon the stage at which the investor has come on board. Ultimately, it boils down to a risk factor the investor takes on their investment. Ideally, the higher the risk, the better the potential payoff.