Who is an Investor?
An investor is an individual that puts money into an entity such as a business for a financial return. The main goal of any investor is to minimize risk and maximize return. It is in contrast with a speculator who is willing to invest in a risky asset with the hopes of getting a higher profit.
There are many types of investors out there. Some invest in startups hoping that the company will grow and prosper; they are also referred to as venture capitalists. In addition, there are those who put their money into a business in exchange for part ownership in the company. Some also invest in the stock market in return for dividend payments.
What is Investing?
The act of putting money into a business or organization to earn a profit is called investing. With a small business, an investor takes on the additional risk of making little to no profit as the business may or may not succeed. However, with a publicly traded company, there is a wealth of information available on the company’s financial position that will allow the investor to make a more calculated decision and enter and exit the market as they please. In the U.S, the Securities Exchange Commission (SEC) regulates the investment risk in publicly traded companies.
Types of Investors
1. Retail or Individual Investor
A retail or individual investor is someone who invests in securities and assets on their own, usually in smaller quantities. They typically buy stocks in round numbers such as 25. 50, 75 or 100. The stocks they buy are part of their portfolio and do not represent those of any organization.
However, many individual investors make trades based on their emotions. They let fear and greed dictate the stocks they buy. It is not the most optimal way to trade as stock markets are incredibly volatile, and it is often hard to predict the direction in which the stock will move.
2. Institutional Investor
An institutional investor is a company or organization that invests money to buy securities or assets such as real estate. Unlike individual investors who buy stocks in publicly traded companies on the stock exchange, institutional investors purchase stock in hedge funds, pension funds, mutual funds, and insurance companies. They also make substantial investments in the companies, very often reaching millions in dollars in value. The institutional investor is not the beneficiary of the earnings from the investment, but the company as a whole act as a beneficiary.
However, according to the UK’s HM Revenue and Customs Office, an institutional investor can either invest on behalf of others or in their own capacity. If they invested using their account, then they would not be considered an institutional investor. While some people own their shares, others own them through institutional investors who invest their money in other savings or investment accounts.
For example, a portion of many people’s paychecks is given to a pension fund each month. The pension fund uses the money to buy other financial assets to earn a profit. In this case, the pension fund is an institutional investor as they are buying shares on behalf of the people who invested their money in the fund.
Since institutional investors buy securities and financial assets at a much greater scale than their retail counterparts, they often exert a significant influence over the financial markets and the economies of nations. They are also a major source of capital for companies that are publicly listed on the stock exchange.
Individual vs. Institutional Investors
The two types of investors differ in a number of ways, including:
1. Access to resources
Institutional investors are very large companies and can take advantage of numerous resources such as financial professionals to oversee their portfolio on a daily basis, allowing them to enter and exit the market at the right time. Individual investors need to do the same on their own through research and available data.
With institutional investors, the investments are usually overseen by different individuals in the organization. For example, the board of directors makes the decision-making process more challenging as people are likely to propose different ideas on what trades to make. As an individual investor, you are your boss and the sole decision maker when it comes to buying and selling shares.
3. Identifying investment opportunities
Since institutional investors are able to access a large number of resources and capital, they are privy to investment structures and products available before anyone else. By the time investment opportunities reach from the hedge fund or private equity funds to the individual investor level, the rest are able to use second-hand investment strategies that have already been implemented by the large institutions.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: