An investor is a person or institution that invests its funds in various assets with the aim of making a profit. Investors can invest in a wide range of assets such as stocks, bonds, real estate or mutual funds. An investor’s primary objective is to appreciate his or her capital, taking into account various factors such as yield, risk, market conditions and time horizon when selecting investments. This article focuses on the different types of investors, their investment strategies and the factors that influence their decision-making.
Who is an investor (definition)
In economic terms, an investor is an entity (individual, firm or institution) that allocates its financial resources to assets with the expectation of future economic gain or capital appreciation. By investing, it forgoes current consumption and invests its capital in productive assets, such as stocks, bonds, real estate or businesses, with the aim of earning a return in the form of dividends, interest or capital gains.
Investors influence market processes by supporting business growth, innovation and job creation through their investment decisions. At the same time, they have to consider factors such as risk, liquidity and time horizon that affect their return.
Investment styles and risk tolerance
Investment styles and risk tolerance are key factors that determine how an investor approaches asset selection and portfolio management. Different investors have different objectives, time horizons and risk appetites, which influence their investment strategies.
Styles of investing
Conservative investing
- The aim is to preserve capital and protect against losses.
- Investors with this style prefer low-risk investments such as government bonds, fixed deposits and low-yield instruments. They focus on stable but lower returns, avoiding volatile markets.
- Typical investors may also be, for example, retirees or those who need a stable income and cannot afford significant losses.
Balanced investing
- The aim is to strike a balance between capital growth and stability.
- This style combines a variety of assets such as stocks, bonds and real estate to allow the investor to achieve modest growth while still maintaining some protection from losses. The portfolio is usually diversified and includes moderate risk assets.
Growth (aggressive) investing
- Maximum capital growth and high appreciation is the primary objective.
- Investors are willing to bear higher risk to achieve higher returns. They prefer stocks of fast-growing companies, startups, venture capital and other volatile investments. They expect long-term appreciation, even if they are exposed to higher volatility and potential losses.
Income investing
- The objective is to obtain a stable income from investments.
- This style focuses on investments that generate regular income, such as dividend stocks, bonds, real estate with rentals, or high-yield mutual funds. The return on capital growth is secondary; the primary goal is consistent cash flow.
Risk tolerance
Risk tolerance reflects an investor’s ability and willingness to tolerate volatility and potential losses when investing. There are several levels of risk tolerance:
- Low risk tolerance: investors prefer safety over potential high returns. They are very sensitive to market volatility and prefer stable, predictable investments. Investment assets may include government bonds, term deposits, low-risk mutual funds.
- Medium risk tolerance: investors are willing to bear a certain level of risk to achieve a balanced return. They seek a balance between safety and growth. Investment assets are e.g. a combination of equities, bonds, real estate and dividend stocks.
- High risk tolerance: investors are prepared to face significant market fluctuations and temporary losses in order to maximise returns. This includes e.g. growth stocks, startups, venture capital, cryptocurrencies, commodities. Aggressive investors are often younger individuals with a long-term horizon who have plenty of time to recover from potential losses.
Passive investors vs. active investors
Passive investors and active investors represent the two main approaches to investing, differing in investment management style, time commitment and return expectations.
Passive investors
- Passive investors follow a buy and hold strategy, investing in broadly diversified assets and holding their investments for the long term, without trying to change their portfolio or time the market frequently.
- Most often, they invest in passive investment products such as index funds or exchange-traded funds (ETFs) that track the performance of a specific index (such as the S&P 500).
- Portfolio management is time-saving because passive investors do not spend much time analysing the market or individual companies.
- Passive investing typically yields lower fees because it does not require frequent trading or portfolio work through an active manager.
- Returns from passive investing are often close to average market returns. The aim is to minimise costs and benefit from market growth over the long term. Passive investors accept market volatility and aim to achieve growth over a longer time horizon.
Active investors
- Active investors try to outperform the market through frequent trading, analysis and market timing. They often buy and sell assets to take advantage of short-term market movements.
- They analyse individual companies, markets or sectors and invest in specific stocks, bonds or derivatives that they believe offer the best opportunities for profit.
- Active investing requires more time and experience, as active investors must regularly monitor and analyse market conditions, news, macroeconomic indicators and the development of individual companies.
- Active investing comes with higher fees because it involves more frequent trading and often professional management fees.
- Active investors seek to achieve higher returns than the market average, but in doing so they take on more risk. They may benefit from short-term price fluctuations, but at the same time they risk making the wrong decisions, which can lead to losses.
Investor in legislation
In Slovak legislation, the investor is defined and regulated by various laws concerning investment and investor protection in the financial markets. The legislation distinguishes between different types of investors (e.g. retail and professional) and regulates the rules for investment activities, management of investment funds, financial institutions and investment services.
- Securities and Investment Services Act (Act No. 566/2001 Coll.): the Act regulates securities trading, the provision of investment services and investor protection. It defines rules for investment companies, stock exchanges and other entities dealing with investments.
- Act on Collective Investment (Act No. 203/2011 Coll.): the Act regulates the rules for collective investment, i.e. investment funds that collect capital from several investors and then invest it in various assets such as shares, bonds or real estate.
- Act on Consumer Protection in Distance Financial Services (Act No 266/2005 Coll.): the Act applies to investors who invest via the internet or telephone.
- Act on Bankruptcy and Restructuring (Act No. 7/2005 Coll.): in the event that a company in which an investor has invested capital goes bankrupt, this Act regulates the procedures for the protection of creditors, including investors, who are entitled to have their claims satisfied.
- Act on Financial Market Supervision (Act No. 747/2004 Coll.): the Act regulates the rules for the National Bank of Slovakia (NBS), which supervises the financial market and protects the rights of investors. The NBS is tasked with monitoring the market, approving investment products and supervising the activities of financial institutions in order to prevent unfair practices and protect the interests of investors.
Types of investors in Slovak legislation
- Retail investor: an ordinary individual who invests in the financial markets without much expertise. This type of investor has the highest level of protection in legislation.
- Professional investor: an entity or individual who has a higher level of knowledge and experience to make more sophisticated investment decisions. Includes banks, insurance companies, funds or investment companies.
- Qualified investor: an investor who has sufficient knowledge and experience to invest in more complex financial products. Such an investor may be a professional or an individual who meets certain criteria, such as a minimum amount of capital.
What is an Angel investor?
An angel investor is an individual who provides funding to budding entrepreneurs or startups in the very early stages of their development. These investors typically invest their own money in exchange for a stake in the company or convertible debt. Angel investors differ from traditional venture capitalists(VCs) in that they invest smaller amounts of money and are often willing to take more risk. In addition to funding, they may also offer mentoring, contacts and advice to help entrepreneurs grow their business. These investors are important because they provide startups with capital at a time when access to bank loans or traditional investment sources is limited.
The biggest investors in the world
Here’s a list of some of the world’s greatest and most influential investors who are known for their success and investment strategies:
1. Warren Buffett
- Warren Buffett is considered one of the most successful investors of all time. He is the chairman and CEO of Berkshire Hathaway, an investment company through which he has invested in a wide range of companies.
- Buffett follows value investing, which means he buys undervalued shares of quality companies with long-term growth potential.
- Well-known investments include companies such as Coca-Cola, Apple, American Express and Bank of America.
- Net worth is approximately USD 100 billion (as of 2023).
2. George Soros
- George Soros is the founder of Soros Fund Management and is famous for his bold speculations in the currency markets. His most famous transaction was a speculation against the British pound in 1992 that netted him more than $1 billion.
- Soros is known for his macroeconomic strategy, which involves speculating on macroeconomic changes, including exchange rates, interest rates and geopolitical events.
- A net worth of approximately $8.5 billion (as of 2023), with a large portion of its assets reportedly donated to philanthropy.
3. Ray Dalio
- Ray Dalio is the founder of Bridgewater Associates, one of the largest hedge funds in the world. His firm manages billions of dollars for institutional investors such as pension funds and government funds.
- Dalio became famous for his “All Weather” portfolio theory, which focuses on creating a portfolio that is resilient to all economic conditions. He invests according to global macroeconomic trends and often uses statistical analysis and risk models.
- Well-known investments are e.g. a globally diversified portfolio including bonds, equities, commodities and currency positions.
- Net worth is approximately USD 16 billion (as of 2023).
4. Carl Icahn
- Carl Icahn is known as one of the most aggressive activist investors. Through his company, Icahn Enterprises, he buys stakes in companies to influence their management and improve shareholder value.
- Icahn is an activist investor, which means that after acquiring a significant stake in a company, he pushes management to make changes that he believes will increase shareholder value.
- Well-known investments include Apple, Netflix, Herbalife and TWA.
- Net worth, approximately USD 24 billion (as of 2023).
5. Jim Simons
- Jim Simons is the founder of Renaissance Technologies, one of the most successful quantitative hedge funds. He is best known for developing mathematical and statistical models to predict movements in financial markets.
- Simons uses quantitative trading strategies that rely on mathematical models and big data analysis. His Medallion Fund has one of the best returns in the history of investment management.
- Net worth of approximately USD 29 billion (as of 2023).
6. Peter Lynch
- Peter Lynch is the former manager of Fidelity Investments’ Magellan Fund. Under his leadership, the fund delivered outstanding returns and significantly outperformed the market in the 1970s and 1980s.
- Lynch focuses on long-term value investing and is known for his theory of “investing in what you know”. He favoured selecting undervalued companies with growth potential.
- Net worth of approximately USD 450 million (as of 2023).
7. David Tepper
- David Tepper is the founder of Appaloosa Management, a hedge fund that made huge returns by investing in poorly valued assets during financial crises.
- Tepper is known for his ability to profit from market chaos and crises by investing in poorly priced assets that the markets undervalue. He often invests in companies undergoing restructuring or financial problems.
- Net worth of approximately USD 18 billion (as of 2023).
8. John Paulson
- John Paulson became famous for betting against the mortgage market during the 2007/2008 financial crisis, which brought him huge profits. He is the founder of Paulson & Co, one of the most successful hedge funds.
- Paulson is known for his speculative bets on global macroeconomic trends. In 2007, he made a significant profit on a bet against US mortgage-backed securities.
- Net worth of approximately USD 4 billion (as of 2023).
How to become an investor
Becoming a successful investor according to the world’s best investors involves the following steps:
Educate Yourself (Warren Buffett)
Buffett always stresses the importance of knowledge. Invest in yourself, read books on investing, follow the market and understand the basics of finance so you can make informed decisions.
Start investing early (Charlie Munger)
Time is of the essence, the earlier you start investing, the more time your capital has to grow. Munger says compound interest is an investor’s greatest friend.
Invest for the long term (Peter Lynch)
Choose good companies and hold your investment for the long term. Don’t try to time the market, let the investments grow with time.
Diversify your portfolio (Ray Dalio)
Mix different assets to minimize risk. A diversified portfolio protects you from large losses.
Be Disciplined (Benjamin Graham)
Graham, the father of value investing, says success depends on discipline and patience. Leave emotions aside and stick to your plan.
Follow fundamentals, not speculation (Warren Buffett)
Buffett always invests in companies that are undervalued but have strong fundamentals. Don’t be swayed by short-term market fluctuations.
How do investors make money?
Investors make money in different ways depending on the type of assets they invest in. Here are the main ways investors generate profits:
Capital growth (capital gains)
Investors buy shares in companies in order to sell them at a higher price than they bought them. If the value of the share rises, the investor makes a capital gain. An investor may buy a property and sell it later when its value rises.
Dividends
Some companies pay regular dividends from their profits to shareholders. This provides the investor with a steady income without the need to sell shares.
Interest income
The investor earns money through interest payments (coupons), which are paid regularly by the bond issuer. When the bond matures, the investor receives back the face value of the bond.
Rent
Property investors can earn money by renting out their property, which provides them with a regular income.
Valuation of investment funds
Investors earn when the value of the fund’s shares grows (mutual funds and ETFs), or they may receive dividends that the fund distributes from profits.
Speculative profits
Short-term trading, for short-term price movements of assets such as stocks, commodities or currencies.
Lever effects
Investors can use derivative instruments (e.g. options or futures) and leverage to maximise their profits. However, this also increases the risk of losses.
In conclusion
Investors play a key role in the economy by providing capital to support entrepreneurship, innovation and development. Whether it is individual investors building their personal wealth or institutional investors managing billions of dollars, investing offers the opportunity to capitalize on funds and achieve long-term goals. Being a successful investor requires knowledge, patience and discipline, but with the right strategy and approach, investing can be one of the most effective ways to achieve financial independence and stability.
