Types of Investors in the Stock Market

There is a wide diversity among investors, depending on their investment styles, mandates, horizons, and assets under management. Primarily, investors are either individuals, in that they invest for themselves or institutions, where they invest on behalf of others. Risk appetites and return requirements greatly vary across investor classes and are key determinants of the investing styles and strategies followed as also the constraints faced.

Primarily investors can be categorized into two groups:

  1. Individual Investors: While in terms of numbers, individuals comprise the single largest group in most markets, the size of the portfolio of each investor is usually quite small. Individuals differ across their risk appetite and return requirements. Those averse to risk in their portfolios would be inclined towards safe investments like government securities and bank deposits, while others may be risk takers who would like to invest and/or speculate in the equity markets. Requirements of individuals also evolve according to their life-cycle positioning. For example, in India, an individual in the 25-35 years age group may plan for purchase of a house and vehicle, an individual belonging to the age group of 35-45 years may plan for children’s education and children’s marriage, an individual in his or her fifties would be planning for post-retirement life. The investment portfolio then changes depending on the capital needed for these requirements.
  2. Institutional Investors: They comprise the largest active group in the financial markets. Institutions are representative organizations, i.e., they invest capital on behalf of others, like individuals or other institutions. Assets under management are generally large and managed professionally by fund managers. Examples of such organizations are mutual funds, pension funds, insurance companies, hedge funds, endowment funds, banks, private equity and venture capital firms and other financial institutions.

In nutshell we can summarize the discussion on types of investors like this:

The key participants in the financial system are government, business and individuals. Each one of these may act as a supplier of fund or investor of fund. Depending upon the investment objectives, individuals put their savings in a variety of investment alternatives made available to them, for example, savings accounts, debt or equity instruments, insurance policies, etc. On the other hand, mainly individuals demand for funds for financing the acquisition of property like automobiles or house. Considering both the sides, individuals are net suppliers of funds as they put more funds into the investment process than they take out. Whereas government and business are net demanders of funds as they take more funds from the process than they put into it.  Thus, the role of individuals in the overall growth and development of the financial system, and indirectly in the development of the economy is very significant.

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