An investor is any individual or entity who commits capital to earn a return through investing. This can take the form of investing in stocks, bonds, mutual funds, ETFs, commodities, real estate, or even businesses.
When seeking investors, it’s essential to find those who understand your business and share similar values – this will allow for long-term relationships which benefit all parties involved.
1. Active Investor
An investor seeks to maximize returns by investing in equity or debt investments, such as stocks, bonds, mutual funds, companies, real estate, derivatives, and commodities. Investment strategies may range from individuals purchasing stocks through an online brokerage account to multi-billion dollar fund managers investing globally.
As an active investor, one of the primary advantages is having complete control of your investments. Active investors can research and trade securities based on their views of market behavior or select an actively managed index fund designed to outperform a particular index.
Active investments differ from passive ones because they cannot be automated; active investors use buy-and-sell strategies to exploit market inefficiencies. For instance, active investors might choose stocks based on book value (i.e., its price-earnings ratio) or those which appear underperforming but possess promising future growth metrics as active investment targets.
Active investing requires both time and effort in order to be successful, with experts having to know when it’s best to buy or sell depending on market conditions; often, this means digging through company earnings reports or conducting an extensive analysis of economic and monetary factors.
2. Passive Investor
Passive investors take a hands-off approach to invest, leaving it all up to the market. They typically utilize index mutual funds or ETFs to meet their financial goals, seeking average returns from rising markets while accepting less-than-ideal results in declining ones.
Passive investing requires a minimal time commitment. Most passive investors only check in with their portfolios at tax time or when ready to sell assets, making this hands-off approach to investing ideal for avoiding emotional decision-making that can lead to bad investment choices.
Passive investors tend to pay lower fees than active ones because they forgo paying research analysts and portfolio managers to buy and sell stocks frequently, which can save a substantial sum over long-term periods when trading costs become costly. They also benefit from deferring capital gains taxes until selling assets, which reduces the risk of unexpectedly large tax bills all at once. Unfortunately, passive investing may mean lower returns due to a lack of skill.
3. Institutional Investor
Institutional investors are large entities that manage money for customers, members, or shareholders. Examples include pension funds, mutual funds, banks, hedge funds, and insurance companies. Institutions differ from individual retail investors in that they can buy and sell large blocks of securities at once, which significantly impacts prices.
Institutional investors also possess access to resources not readily available to retail investors, providing an edge in improving returns while mitigating risk. Institutional investors can invest across numerous asset classes such as private equity, real estate, and foreign exchange trading, plus take advantage of markets otherwise off limits to retail investors like commodities and futures trading.
At its core, all investors seek to achieve specific financial goals such as retirement savings, funding a college education, or creating wealth over time. Different investment vehicles may be utilized to achieve those objectives while seeking a rate of return that minimizes risk while optimizing growth. Active, passive, or institutional investors should have clear investment objectives and an action plan for success, including how revenue and profitability will be achieved and demonstrated; otherwise, they risk failure.