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Investors are people or entities that risk their money in various financial assets or ventures with the expectation of earning a return, which they may or may not realize. Here’s what you need to know about what an investor does, types of investors and the types of things investors invest in.
What is an investor and what do they do?
An investor is a person or organization that provides capital with the expectation of earning a return on their investment. Investors assume the risk that a venture may fail and are compensated in the form of a return if they are successful.
There are many different types of investors and they employ a variety of investment strategies ranging from very simple ones that require little financial knowledge to very sophisticated approaches used by professional investors.
Professional investors spend their days researching investments – both current and new opportunities – and may meet with company management teams. Some professional investors may also spend time meeting with existing and potential clients.
Types of investors
Investors come in all shapes and sizes, but can broadly be separated into two categories: individual investors and institutional investors.
Individual, or retail, investors invest on their own behalf. This includes people that invest for retirement through 401(k) plans or IRAs, as well as someone who buys and sells securities in a brokerage account.
Individual investors are typically managing significantly less money than institutional investors and likely won’t have access to the same resources. Here are some other ways individual and institutional investors differ.
Institutional investors are investing money that doesn’t belong to them on behalf of other investors and covers a broad range of entities. Hedge funds, mutual funds, pension funds, insurance companies would all fall under the category of institutional investors.
Institutional investors typically invest more broadly than individual investors and might include assets such as real estate, private equity or other alternative investing strategies.
Investors vs. traders: What’s the difference?
The terms investors and traders are often used interchangeably in the financial media, but there are some major differences between the two.
Traders tend to be more short-term focused and may hold positions for just a few weeks, days or even seconds. In fact, traders may not even care about the underlying assets they’re trading if they’re trading based on technical analysis, which uses charts and other tools in an effort to predict future prices. The success of a trader depends on short-term price changes, rather than the performance of the underlying asset.
Investors, on the other hand, tend to take a longer-term view, with intended holding periods of years rather than days. The longer you hold an asset, the more your return will be determined by the underlying asset’s performance rather than the whims of traders at a given time. As famed security analyst Benjamin Graham said, in the short run the market is a voting machine but in the long run it is a weighing machine.
What do investors invest in?
Investors invest in a number of different types of financial assets where they hope to earn a return on their money. Below are some of the most popular investments.
- Mutual funds and exchange-traded funds (ETFs)
- Hedge funds
- Real estate
- Venture capital (early-stage companies)
Investors may also own assets that don’t produce anything for their owners, meaning the return is entirely based on what you can sell the asset for to someone else. These assets are more speculative by nature.
Investors can be individuals or institutions that invest money with the expectation of generating a return. They invest in a wide variety of assets such as stocks, bonds, real estate and more. Investors tend to take a longer-term perspective than traders, who may hold their positions for just a matter of days or less. Beginner investors may want to consider investing in low-cost index funds before trying to identify individual stocks or other winning securities.