What types of investors are there in financial markets?
In a market as wide as the financial one, we can find a multitude of investors grouped within different criteria: category, objective, investment horizon, risk aversion, or the way they operate.
The multitude of actors who operate in financial markets interact with each other to exchange financial assets and allow money from individuals and institutions to be channeled into investments. That's why in financial markets you can find asset issuers (companies or governments), intermediaries (financial institutions), supervisors and regulators, and investors. Different types of investors can be classified based on criteria such as category, objective, investment horizon, risk aversion or their way of acting when operating in the market.
According to the investment category
One can distinguish between an individual or retail investor and an institutional one.
- Individual investor. A person (physical or legal) who makes investments on their own account, thus creating their own portfolio with the aim of obtaining a return on their savings.
- Institutional investor. Large and specialized investors who usually pool the capital of many investors. Includes investment funds, pension funds or insurance companies. By concentrating the capital of many investors and taking significant positions, they can influence the management of the companies they invest in because at shareholders' meetings they can vote for or against company policies.
What advantages do institutional investors offer individual ones?
Institutional investments offer numerous advantages over individual investments. First, by managing large sums of money, institutional investors can create more diversified portfolios and therefore spread the capital invested into assets with different characteristics, which reduces the investment´s risk. In addition, when carrying out larger operations than those carried out by an individual investor, the commissions are lower. These institutions also have superior knowledge of the market due to the highly qualified managers they have in their ranks. Due to this, they also offer operational advantages such as the reinvestment of capital gains already generated (known as compounding) or reductions in procedures for collecting interest and dividends on portfolio assets.
According to the objective and investment
A distinction is made between:
- Strategic investor. Their investments seek to add value to the companies in which they invest in. They are long-term investors looking to enter a market niche that they usually know very well.
- Financial investor. With their initial investment, this investor´s decisions are aimed at generating profitability in the short- and medium term. In general, they do not intervene directly in the management of the companies in which they invest in, and their impact on it is through voting at shareholders' meetings..
According to risk aversion
Risk aversion is understood to be an investor's tolerance for losses. It has a psychological component, but the term of the investment can be influential: the longer the term, the more time there is to recover from a drop in portfolio assets, this way more risk can be taken. Three profiles can be distinguished depending on the risk aversion:
- Conservative profile. Investors who seek a very low level of risk. They focus their investments on fixed income such as government bonds and equity assets with low volatility, such as with solvent, stable and large capitalization companies.
- Moderate profile. This investor seeks a higher level of risk than a conservative one, but always looks for stability in their operations. They combine fixed income assets with equity assets to balance the risk of more volatile assets with less volatile ones.
- Aggressive profile. Their exposure to risk is high, as is their tolerance for losses; seeks to make the most of their investments. This type of investor withstands high volatilities, so it is important for them to have a diversified portfolio in order to reduce exposure to few assets. They tend to be investors with more knowledge and experience in financial markets than those with less aversion to risk.
According to their way of operating
The following types of investors can be found:
- Friends & Family. They tend to invest in companies whose founder they know. They are the least specialized profile and usually lend small amounts of money for the launch and expansion of startup companies managed by family or friends. They are usually easier to convince to invest given their emotional bond with the founder, but the capital they can contribute is usually less than that of a more specialized investor.
- Business angels. Investors with high levels of knowledge regarding a specific sector who bet on large business projects with high growth potential when the company is in its early stages. They also add value thanks to their expertise and networks.
- Family office. Specialized in the management of large family assets, their objective is managing heritage assets in a global unit and generating a revenue that allows this heritage to grow, while preserving it for future generations. Depending on the number of family assets managed, there are SFOs (single family offices) and MFOs (multi-family offices), although the latter are not very widespread in our country.
- Venture capital. The objective of venture capital funds is to enter the shareholding of the companies they finance to increase their value. Once this happens, they withdraw from the asset obtaining a profit. Within this type of investor there are several types, such as venture capitalists (VC), specialized in startups which are often tech companies, and private equity investors, which invest in all types of companies, some already established.
The sustainable investor
Due to the growing regulatory requirements for sustainability and investors´ demands, sustainable investing has become increasingly important for large asset managers. According to the Schroders Institutional Investment Study for 2020, the most important factor for investors was the integration of ESG criteria (environmental, social and corporate governance), which guided 67 percent at the time of their investment. According to data from the National Securities Market Commission (CNMV), the growing interest in clean energy in our country strongly boosted this sector in the stock market in 2020, with a €6.6 billion capital injection.