An investor can be a person or organization that allocates money with the goal of achieving certain financial returns in the future. Investors frequently put money into businesses or other assets with the intention of making a profit over time. While the degree of risk will vary, an investor will take on a certain level of risk for the potential to eventually earn more money than the capital that they invested in the first place.
Types of investors
Types of investors
There are numerous types of investors, including both individuals and institutions. Most investors generally desire to maximize their returns while minimizing risk. These different types of investors include:
- Individual investors: Also known as retail investors, these are people who invest their own money in securities and other investment products. Individual investors typically invest in companies or professionally managed funds through a bank, online broker, or mutual fund, buying smaller amounts more frequently.
- Institutional investors: These are professional investors, such as a company that pools money from many investors to invest on their behalf. Institutional investors can include banks, mutual funds, pension funds, insurance companies, and hedge funds. Not only do these investors comprise a significant quantity of overall stock trading volume, but buy or sell actions can result in major moves in the broader market.
- Angel Investors: These investors tend to invest their own personal money in start-ups, hoping for significant growth and gains when the company is eventually sold or goes public. Angel investors are typically wealthy individuals who invest their own money in start-ups and small businesses and receive equity or convertible debt in return.
- Venture Capitalists: Venture capitalists provide capital to start-ups and small businesses in exchange for an ownership stake. These investors can be individuals or organizations that focus on companies with the potential for rapid growth, advising them on strategy and operations. Venture capitalists often acquire a certain level of operational control when they take an equity stake in the business.
Different investors may have varying buy-and-hold time horizons, ranging from short-term traders to long-term investors. Investors also tend to have different investment styles, including growth investing and value investing.
Growth investing is an investment strategy in which an investor focuses on buying shares of companies that are expected to grow significantly faster than the overall market. This approach often involves prioritizing companies with strong potential for future expansion while accumulating a higher level of risk.
Value investing is an investment strategy in which an investor buys stocks that are considered to be trading below their intrinsic value, meaning they are priced lower than what the investor believes they are truly worth. The goal is to hold them until the market recognizes their true value and the price increases accordingly.
How do investors make money?
How do investors make money?
Investors can make money in a few different ways, depending on the type of investor. For instance, individual investors often aim to invest in assets like stocks and then sell them at a higher price years later for a profit. This is called capital appreciation and is the primary way that most individual investors make money.
Many companies allocate a share of their profits to investors in the form of dividends, which can provide another source of regular income. Most dividends are distributed on a quarterly basis.
Fixed-income securities like bonds can also yield returns for investors from interest payments. Individual investors can reinvest their earnings from capital gains or dividends to compound their returns with time.
Institutional investors make money by generating returns on the investments they make in various assets but have a much larger pool of capital to work with than individual investors. These organizations make money through capital appreciation, dividends, interest income, and by charging management fees to the clients on whose behalf they are investing.
Institutional investors, such as large investment managers, often charge fees as a percentage of assets under management or based on the performance of those underlying investments. Angel investors and venture capitalists make money by buying equity stakes in early-stage companies, with the goal of achieving a profit when the company is eventually sold through a merger or acquisition, or goes public via an initial public offering (IPO).
Angel investors typically invest small amounts of personal money in very early-stage start-ups. Meanwhile, venture capitalists often manage larger funds from institutional investors and invest in slightly later-stage companies with more established businesses.
What investments do investors buy?
What investments do investors buy?
Investors can make many types of investments, including stocks, bonds, mutual funds, and real estate. These investments can include:
- Stocks: Investments in a company’s assets and earnings that investors can buy and sell.
- Bonds: Loans to a corporation, government, or municipality that allow investors to receive interest payments and the return on principal once those bonds mature.
- Mutual Funds: A pool of shareholder capital that is invested in stocks or bonds.
- Exchange-traded funds (ETFs): Publicly traded funds that invest in a range of assets, which can include stocks, bonds, and other securities. ETFs are often intended to track the performance of a sector, currency, or index.
- Alternative investments: Investments that are not traditional stocks, bonds, or cash. They can include real estate, commodities, private equity, cryptocurrencies, and art.
- Commodities: Commodities are raw materials, basic goods, or natural resources that are used to make products or consumed directly. Precious metals, energy resources, and agricultural resources are a few examples.
Related investing topics
Examples of well-known investors
Examples of well-known investors
There are many examples of successful investors who follow differing investing styles to achieve their desired returns. The Oracle of Omaha, Warren Buffett, is a classic example of a prominent individual value investor who finds companies that are undervalued relative to the market and invests in them for the long term (usually decades).
Thomas Rowe Price Jr., who founded the multinational T Rowe Price Group (TROW 0.99%) in 1937, is one of the most prominent historical examples of a growth investor. His philosophy was focused on investing in companies during their early stages of growth, with robust fundamentals and a focus on strong company leadership. He also gravitated towards companies that had the potential for above-average earnings growth, even if they had elevated valuations.
Many investors prefer to put cash to work in a combination of growth, value, and dividend stocks when investing. Whether you're a new investor looking to put your money in the market or have been investing for years, it's important to understand your investment options, goals, and risk tolerance as you work to build a profitable, diverse portfolio that stands the test of time.
