Investing in the stock market can be done in multiple ways and this gives rise to different types of investors, and the rewards received by such investments vary. Depending on your capital availability, risk appetite, investment tenure, etc., you can develop your investment style with specific return requirements. It is also important to note that retail stock investment is not the only type of investment in the share market but rather one of the many that can be used.
Most stock markets, be it domestic or international, have diversified investments apart from the general retail trading mechanism. Knowing all these options can help you find a suitable method for yourself even if you are wary of retail investment. We at the Thought Tree Institute help many new investors to gain the upper hand in stock trading by providing effective training in multiple investment techniques, tools, and categories.
Here we have compiled a list of several types of investors that are available in the equity trading market. Read along to get insights into the differences and determine your type.
Types of Investors in the Stock Market
I.} Characterization based on Group:
There are two main categories based on investor groups. The first category is individual investors, and the other is institutional investors. We will have a detailed look at their differences in the passage below.
A] Individual Investors:
Any types of investors who purchase equity from the market to hold them personally can be described as an individual investor. This is a major category, with many people investing in the stock market through brokers and holding their investment for gains or savings. Based on the amount that is invested, they are further categorized as;
a.] Retail Investors:
These are individuals that can make investments of less than 2 lakhs on the stock market in the form of either the IPO or stocks. Retail investors are generally common people who utilize their savings to invest and gain higher returns than a savings account. Even though there are many individuals in this category, they only account for 6% of the capital invested in the market. With increased cash dispensation, financial literacy, and increased income, there is a rise in retail investment in India. The number of Demat accounts and the associated investment capital has risen for several years.
b.] High Networth Individuals (HNI):
Investors that have more than 2 crores deployed in assets on the stock market are called HNI. High net worth individuals should have a positive ratio of such assets compared to their liabilities. The IPO and Stock investment of such individuals is generally conducted through separate channels. As with retail investors, there has been a general rise in the HNI over the past several years. This is because of increased capital investment by wealthy individuals in Stocks compared to volatile businesses.
B] Institutional Investors:
Institutional Investors are large groups of people or companies that utilize capital from individuals to invest in a diverse array of equities, commodities, and forex. Such institutions raise the capital through cooperative or corporate means. This means that either several individuals form a cooperative investment firm or individuals can supply the capital to companies for investment. These financial institutions provide a return on investment through diversified means as per the net gains.
a] Domestic Institutional Investors:
In this category, the investment is done through various institutional channels but only in their respective country of origin. This means the investors are providing capital to purchase Indian equities and commodities. There are several types of institutions through which individuals can invest in the domestic market. Mutual Funds, Pension Funds, Insurance Funds, and Scheduled Banks can invest money on behalf of such institutional investors.
b] International Institutional Investors:
International Institutional Investors generally tend to use their capital to buy foreign stocks and commodities through various channels. They can utilize Sovereign Wealth Funds and Hedge funds to direct their capital in International markets.
Sovereign funds can be purchased as bonds issued by various countries for individuals as part of an investment in that particular nation. Hedge Funds are generally issued by companies that invest mostly in liquid assets in diverse countries for high risk and better returns. Apart from these two, Mutual Funds and Insurance Funds also tend to have foreign portfolios and domestic investments.
Individuals make institutional Investments as a means of low risk, moderate return strategy. Retail Investors have to keep a constant lookout for market volatility and new investment opportunities. Institutional Investors outsource such worries to the Fund Managers of the organization that they have invested in. Returns on capital are therefore secured in exchange for free investment opportunities. By use of retail and institutional instruments, individuals can generate a profile of balanced returns.
II.} Categorization based on Risk Appetite:
Investors can be categorized based on risk appetite. Investments in the Stock Market are not generally guaranteed to generate the best returns and sometimes may also lead to losses. But mitigation of losses and increased wealth generation can be devised using various tools and techniques. Investors can use all available investment instruments to build a profile that suits their risk and reward philosophy. We have categorized the investors based on the relevance of their risk appetite below.
A] Low-Risk Investors:
Retail investors, spanning from young to middle-aged, comprise the majority of low-risk investors. Individuals are likely to rely only on their salaries/business for such initiatives. Since their goals are for long-term returns, minimum-risk investors rarely prepare for extremely short-term investments. Low-risk investors might consider SIP investments in Mutual Fund Schemes. SIP investing can help average out risk and rewards while also instilling the discipline to invest regularly. Such investors might invest in Equity funds to save money on taxes, which can yield significant returns. Low-risk investors are those that engage in stocks to generate a consistent long-term return on their savings.
B] Conservative Investors:
These individuals like to invest in systematic risk with limited cash. Such investors want less fluctuation in their stock investments and rely on monthly consistency at the very least. Conservative investors often spend 20-25 percent of their portfolio in the risky but high-return stock market, remaining in safe investments or mutual funds. Such investors should invest in concentrated mutual funds that have a smaller number of equities in their portfolio and can focus on rewards with a low risk of loss. Long-term investments are used to compound the risks of volatile short-term investments. High-wage earners or post-retirement individuals typically use such conservative investment approaches.
C] Aggressive Investors:
Aggressive investors hold up to 80% of their wealth in retail stocks or commodities. Their risk preferences are strong, with a clear path to larger returns over a longer period. Aggressive investors do not operate just based on their income or savings but rather on the profit generated by such investments. In addition to their development with excellent stocks, they benefit tremendously from compounding gains over a long period of time. Aggressive investors must keep a close eye on their investment portfolio and devote a large amount of effort to such endeavors.
Also Read: What is TBQ and TSQ in Stock Market?
D] High-Risk Traders:
There are high-risk investors, with the majority of them conducting speculative investments and using high-risk, high-return tools. High-Risk Traders use instruments like Futures and Options to gain tremendous capital but at the highest possible volatility. High-Risk traders can also obtain leverage from brokers against their trading to increase their yields. Even though highly risky and with the potential for exponential losses, High-Risk traders can fare well in a short amount of time. Such traders usually have to invest full time during the market hours and may not participate in other employment.
Categorization based on Investment Strategy:
As we have seen in the above sections, there are multiple ways of investment, and multiple combinations of risk mitigation can be used. Individuals choose to invest based on their scope of return and their philosophy. We can categorize important investment styles derived from individual investment experiences and strategies.
A] Value Investors:
Investors who search for discounted stocks with strong potential are known as value investors. Their goal is to uncover consistently successful firms that are now trading at a low price-to-earnings ratio (P/E). These investors expect their investments to rise significantly in the foreseeable future. Value investors are often long-term investors who invest in various volatile firms.
B] Growth Investors:
Stocks with a significant growth outlook based on market demand appeal to growth investors. The finance specialist enterprises are often young and in the early stages of growth. In the long run, such equities’ rates of return are likely to outperform the market. A growth investor is therefore expecting several years of exponential growth. Such investors are less bothered with current prices and instead place a greater emphasis on the company’s fundamental operation.
C] Situational Investors:
Individuals who invest in firms undergoing corporate movements such as mergers, acquisitions, and takeovers are known as situational investors. Such investors rely on current information and insider knowledge of forthcoming developments. When they invest, they tend to follow financial markets carefully. Such investors are more likely to make short-term investments and profit from optimistic trends based on such events.
Traders are investors that invest in equities, commodities, or forex for a very short time with large capital investments. They can be categorized as intraday traders if they purchase and sell stocks within a day or as short-sellers if they hold on to shares for less than a month. Trading is a viable source of high returns, but such investors have to constantly watch over their portfolio, usually throughout the day, to determine the best purchase and sale opportunities.
As we can see, there are many types of investors, and their investment style can be based on several factors based on time, returns, and risk. Even though we have categorized investors in several types, they are not rigid or pre-determined molds. Anyone can develop their style by using all the instruments available at their disposal.
To develop your skills and knowledge of investment in the Share market, you can join us at the Thought Tree Institute for detailed courses. We cover everything from techniques of investment to advanced statistical tools. Connect with us to learn more about the types of investors in the stock market.