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 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
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.
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.
Bottom line
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.
FAQs
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.
What is the role of 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.
What is the job of investors? ›
What Is an Investor? Investors commit their own money or their client's money into products, property, or financial ventures in order to gain more money in return. As an investor, you may invest in the stock market and purchase stocks, bonds, mutual funds, options, and futures.
How do investors make money? ›
How Do Investors Make Money? Investors make money in two ways: appreciation and income. Appreciation occurs when an asset increases in value. An investor purchases an asset in the hopes that its value will grow and they can then sell it for more than they bought it for, earning a profit.
How do investors typically get paid? ›
Dividends are a form of cash compensation for equity investors. They represent the portion of the company's earnings that are passed on to the shareholders, usually on either a monthly or quarterly basis. Dividend income is similar to interest income in that it is usually paid at a stated rate for a set length of time.
How do investors get paid back? ›
The most common is through dividends. Dividends are a distribution of a company's earnings to its shareholders. They are typically paid out quarterly, although some companies pay them monthly or annually. Another way companies repay investors is through share repurchases.
What does an investor get in return? ›
Distributions received by an investor depend on the type of investment or venture but may include dividends, interest, rents, rights, benefits, or other cash flows received by an investor.
How much do investors get paid? ›
A fair percentage for an investor will depend on a variety of factors, including the type of investment, the level of risk, and the expected return. For equity investments, a fair percentage for an investor is typically between 10% and 25%.
What is the income of an investor? ›
Investment income is money you make by selling something for more than you paid for it. Passive income is money you make from something you own, without selling it.
Is an investor an owner? ›
Legal advice. So, are shareholders and investors the same? No. Although the differences are quite subtle; a shareholder is an entity owner of a company when it is possible to buy and hold shares, whereas an investor is someone that puts money into a business that does not have shares issued.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
What happens when you get an investor? ›
While lenders give you money under the assumption that you'll repay it with interest, investors give you money in exchange for partial ownership of your business. As such, their investments may come with restrictions.
How do I become an investor? ›
If you hope to start investing your funds, consider the following six steps:
- Learn the basics of investing. ...
- Consider your investment strategy. ...
- Evaluate your portfolio regularly. ...
- Earn a degree. ...
- Complete an internship. ...
- Gain work experience with a financial institution.
Though you aren't officially obligated to pay back your investor the capital they offer, there is a catch. As you hand equity over in your business as a portion of the deal, you essentially are giving away a portion of your future net earnings.
Can you make a living off investing? ›
Yes, you can earn money from stocks and be awarded a lifetime of prosperity, but potential investors walk a gauntlet of economic, structural, and psychological obstacles.
Do investors cost money? ›
There's a cost to doing business and investing in the stock market is no different. Whether you're just starting out with your workplace's retirement plan or you've been working with a financial advisor for years and have multiple IRAs and brokerage accounts, you're using services and products that aren't free.
What is the responsibility of investors? ›
Your responsibilities as an investor
Read thoroughly all sales literature, prospectuses, and/or other offering documents, when available, before making any investment. Carefully consider all investment risks, fees, and/or other factors explained in these documents.
What is the main goal of an investor? ›
Safety, income, and capital gains are the big three objectives of investing but there are others that should be kept in mind as well.
What is the role and responsibility investor? ›
Investor's responsibilities: Investors play a key role in providing funding and support for your startup. They may also provide valuable connections, expertise, and mentorship.
What are investors responsible for? ›
Investors' fiduciary duties require them to consider all factors that are relevant to investment returns, including ESG issues, and to act accordingly. In some countries, investors are required by law to consider pursuing sustainability outcomes where these can help achieve their financial objectives.
