What Is an Investor?
There are multiple reasons why a company needs money: as a startup, to expand into new locations, to develop a new product, or acquire another company. Whatever the reason, a common way of getting an influx of capital into your budget is by using equity investor. Before you begin seeking investors, make sure that you understand the ins and outs of this type of investment.
An investor is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement, such as with an annuity.
Equity investors are people who invest money into a company in exchange for a share of ownership in the company.
Typically, equity investors have no guarantee of a return on their investment, and may lose their money should the company go out of business. In the event that the company is liquidated, the equity investor may be entitled to a share of the assets.
These investors often expect certain benefits to offset the risk of their investment. For example, an investment agreement may stipulate that the initial investment be paid back over a specific number of years, followed by a share of the profits after the investment is paid off. The terms of an investment agreement can be specified by the company and the investor – and should be considered fair by both parties.
For their investment, equity investors may receive shares of stock – which can rise and fall in value based on current market conditions. These stocks may be bought or sold by the investor through the stock market or other trading platforms.
An investment brings elements of risk, and the equity investor must balance the potential for risk with the possibility of reward. For both the investor and the company, the benefits of the investment must be worth the inherent risk. Detailing the specific requirements for the investment and potential payoffs/losses should be taken care of before the investment and should be scrutinized by financial advisors.
A wide variety of investment vehicles exist including (but not limited to) stocks, bonds, commodities, mutual funds, exchange-traded funds (ETFs), options, futures, foreign exchange, gold, silver, retirement plans and real estate. Investors typically perform technical and/or fundamental analysis to determine favorable investment opportunities, and generally prefer to minimize risk while maximizing returns.
An investor typically is made distinct from a trader. An investor puts capital to use for long-term gain, while a trader seeks to generate short-term profits by buying and selling securities over and over again.
Investors typically generate returns by deploying capital as either equity or debt investments. Equity investments entail ownership stakes in the form of company stock that may pay dividends in addition to capital gains. Debt investments may be as loans extended to other individuals or firms, or in the form of purchasing bonds issued by governments or corporations which pay interest in the form of coupons.
How Investors Work
Investors are not a uniform bunch. They have varying risk tolerances, capital, styles, preferences and time frames. For instance, some investors may prefer very low-risk investments that will lead to conservative gains, such as certificates of deposits and certain bond products. Other investors, however, are more inclined to take on additional risk in an attempt to make a larger profit. These investors might invest in currencies, emerging markets or stocks.
A distinction can be made between the terms "investor" and "trader" in that investors typically hold positions for years to decades (also called a "position trader" or "buy and hold investor") while traders generally hold positions for shorter periods. Scalp traders, for example, hold positions for as little as a few seconds. Swing traders, on the other hand, seek positions that are held from several days to several weeks.
Institutional investors are organizations such as financial firms or mutual funds that invest in stocks and other financial instruments and build sizable portfolios. Often, they are able to accumulate and pool money from several smaller investors (individuals and/or firms) in order to take larger investments. Because of this, institutional investors often have far greater market power and influence than individual retail investors.
Investors can be distinguished from traders in that investors take long-term strategic positions in companies or projects.
Investors build portfolios either with an active orientation that tries to beat the benchmark index, or a passive strategy that attempts to track the index.
Investors may also be oriented toward either growth or value stock picking strategies.
Passive and Active Investors
Investors may also adopt various market strategies. Passive investors tend to buy and hold various market indexes, and may optimize their allocation weights to certain asset classes based on rules such as Modern Portfolio Theory's (MPT) mean-variance optimization. Others may be stock pickers who invest based on fundamental analysis of corporate financial statements and financial ratios.
One example of this would be the "value" investors who seek to purchase stocks with low share prices relative to their book value. Others may seek to invest long-term in "growth" stocks that may be losing money at the moment but are growing rapidly and hold promise for the future,
Passive (indexed) investing is becoming increasingly popular, where it is expected to overtake active investment strategies as the dominant stock market logic by the year 2020. The growth of low-cost target-date mutual funds, ETFs and robo-advisors are responsible for this surge in popularity.