The world of stock investors is very diverse. From investing in real estate to investing in environmentally, socially, and governance-friendly businesses. And everything in between. In this post, I will provide an overview of the different types of investors in the stock market.
The first group of investors I will cover are Retail Investors, Institutional Investors, and Day Traders. In the second group, I’m looking at Real Estate Investors, Passive Investors, Dividend Investors, Value Investors, Growth Investors, and ESG Investors. I will provide some valuable insights and statistics along the way.
General Types Of Investors
You can differentiate the types of investors in financial markets into Retail Investors, Institutional Investors, and Day Traders. Each of them has completely different goals and motivations.
Retail investors are the private individual investors that participate in the stock market. They usually invest only a small amount of money on average.
I’m one of those retail investors. I simply invest through multiple brokerage accounts such as Robinhood, Charles Schwab, M1 Finance, Acorns, etc. My investment time horizon is usually long-term (5+ years).
Here are some interesting recent statistics and trends for retail investors (Source: public.com/research/2023-retail-investor-report).
|# Asset types increased 25% year-over-year|
|Share of ETFs in portfolio increased 4.4x|
|AI related ETFs increased 34% year-over-year|
|69.4% say trust is more important in 2023|
|19% are using AI for research|
|16.4% take social as important signal in decision making|
This type of investor is typically a large organization. Examples are mutual funds, pension funds, banks, insurance companies, hedge funds, etc. As an institutional investor, you invest large sums of money and have them professionally managed. These professional managers invest on behalf of the company and its goals.
Institutional Investors are the big investors on Wall Street. They deal with huge amounts of money and can have a big influence on the price movements of stocks.
Here are some key statistics from an institutional investor survey in 2023 done by NATIXIS:
|65% believe stagflation is a bigger risk than recession|
|72% believe rising rates make traditional fixed income investments more appealing|
|56% expect inflation to be stubbornly elevated|
|57% expect stocks to have elevated volatility|
|83% believe valuations will matter more|
|77% maintain or increase an average return of 7.9%|
In the survey, institutional investors were asked about the biggest economic challenges in 2023. Here is what ranked highest on their radar:
You call yourself a day trader if you buy and sell stocks on the same day. As a Day Trader, you use technical analysis of stock charts to identify and predict short-term market moves.
Day Trading is a very complicated, fast-paced, and highly risky form of investment. Only very few day traders actually turn a profit. One factor that keeps minimizing their profits due to frequent trading is taxes.
Here are some of the most notable statistics about day trading:
- Survival rates of day traders (source)
- 2.5% drop out within one month
- 44% continue for longer than one year
- 24% continue for longer than two year
- 15% continue for longer than three year
- Less than 1% of day traders predictably earn profits (source)
- Many unprofitable day traders persist despite an extensive experience of losses (source)
- Previously unprofitable traders with 50 or more days of past-day trading experience have a 95.3% probability of day trading again in the next 12 months (source)
The statistic that I find very interesting is how many day traders come back to day trading within 12 months of stopping (source):
A large portion of day traders make a comeback almost independently of their track record.
Types Of Investors Based on Company and Stock Type
Let’s take a closer look at the different stock investors based on the type of companies or stocks they choose. You can categorize them in many ways.
I’m concentrating on Real Estate, dividends, ETFs, Index Funds, Value, Growth, and ESG. These categories are well-known and distinct in their style of investing.
If you want to dive into the details about Growth, Value, and Income Stocks, I have a very detailed guide available: Income vs. Value vs. Growth Stocks, which is better?
Real Estate Investors
The Real Estate Investor invests in property with the goal of selling it for a profit. They can be individuals or big corporations alike.
If you want to invest in real estate, you don’t necessarily have to own a property. There are plenty of ways to invest in real estate by purchasing stocks or Exchange-Traded Funds.
You will never actually set foot in the property or deal with being a landlord. But you can still be a part-owner of a property.
A recent report from AppFolio has interviewed 104 real estate investors and gathered the following statistics:
Real Estate now accounts for 30% in 2023 vs. 26% in 2021. This is a significant increase. Stocks and 401k have seen the biggest offset.
36% of Real Estate Investors mention the expectation of market-beating returns as their reason. 38% of them say portfolio diversification was their biggest driver. Only 8% mention low risk as a motivating factor.
In recent years, investing in Real Estate Investment Funds or Real Estate Exchange-Traded Funds has seen a big increase with 15% and 12%, respectively.
If you are a passive investor, you invest in broad and diversified Exchange-Traded Funds, Index Funds, and Mutual Funds. These funds track the overall market (the SPY is often mentioned as a reference).
Your biggest advantage of being a passive investor is that you don’t have to track your investments too much. The approach is hands-off, so you don’t have to track the performance of individual companies.
Traditionally, the S&P 500 has returned 9.82% annually (measured 1928 to 2023). If you only look at the recent years from 2004 to 2023, the annual return is much higher at times. But the average annual return of that range comes in at 8.39%. This timeframe not only includes the recent economic events but also the financial crisis from 2008.
Dividend investors primarily invest in stable dividend-paying companies. You also refer to this type of investor as an Income Investor.
Dividend-paying companies produce a regular income through a monthly, quarterly, or annual dividend. These are well-established companies with a long history. They are not growing at a stellar annual rate anymore. These types of investments are generally considered lower risk. The size of the dividend differs from company to company. You call this the dividend yield. It’s a measurement that compares the company’s stock price to its dividend.
Dividend-paying stocks are getting more popular recently because they deliver stability and predictability. A company rarely stops paying a dividend, although not unheard of. During the COVID-19 pandemic, many companies stopped their dividend program due to the uncertainties. But many of them have since reinstated their dividend.
If a company has raised its dividend consistently for at least 25 years, it belongs to a list called Dividend Aristocrat. There are even exchange-traded funds and mutual funds available if you like these types of companies.
Having a dividend income can provide a lot of financial security and stability for investors. While building out your dividend portfolio, you can use dividend reinvestment to grow your positions automatically.
If you are a Value Investor, you are always on the lookout for stocks that are undervalued when looking at their present stock price. But what makes a stock undervalued? Well, there is no one-size-fits-all answer to this question.
Value Investors are using different models to gauge a company’s value. The models they use can be different for various companies. You would not use the same model for a bank and a technology company. These are fundamentally different businesses.
To be a successful Value Investor, you must know much about the companies you invest in and their financials. It takes time to understand how to properly gauge a company to find an undervalued one and make informed investment decisions.
These are typically large companies, but sometimes a mid-cap stock can also be a good value investment.
In the last 10 years, value stocks have trailed the market rate of return.
I’m very interested to see if Value Investing becomes a more rewarding experience again soon. With the interest hikes in the last two years, the need for profitability could certainly make value stocks more interesting again.
Growth Investors are always looking for the next Apple or Amazon. Ideally, you want to discover these gems as early as possible in their growth stage.
Sometimes, investors can already get into the game around the company’s initial public offering (IPO).
This group of investors has seen a large increase in interest in the last 10 years. It has rewarded investors very handsomely during that time.
Growth companies put growth over profitability in terms of business priorities. What drives their price is future growth, opportunity, and market share. A company can remain in the growth phase for many years.
Some growth companies are also profitable. The most prominent example would be Apple.
The recent interest rate hikes and market conditions are putting more and more pressure on growth stocks. Raising money got much more expensive. This will make Growth Investing more challenging, at least in the near future.
If you are a Growth Investor, you have a higher risk tolerance. Growth companies can rise and fall quickly if they cannot capitalize on their market effectively.
In terms of market capitalization, they are usually small-cap stocks or mid-cap stocks. But they can also occasionally be large-cap stocks, as the example of Apple illustrates.
ESG stands for Environmental, Social, and Governance. It is an ethical investment strategy that aligns with your personal values. A company belongs to this group if it has shown a willingness to improve its performance in these three areas.
Any company from the previously discussed categories can be part of this group.
This category determines what kind of impact a company has on the environment. It can include the carbon footprint, use of toxic chemicals, and sustainability aspects.
What kind of social impact does the company have? Factors included in this category are LGBTQ+ equality, racial diversity, and hiring practices.
In this category, you include how the management team drives positive change. This can include diversification in management, executive pay, and shareholder interactions of the leadership team.
ESG Investing is a very interesting topic. A recent study in 2022 from the Capital Group says that 90% of professionals are using ESG data and view it as supportive.
In the study of NATIXIS, 59% of institutional investors want to increase investments in ESG.
Final Thoughts – Different Types Of Investors In The Stock Market
With so many different investing styles, it can seem overwhelming to choose your strategy.
In this post, I’ve provided valuable insights into the different types of investors. We’ve also taken a look at their strategies and goals of investing. Comparatively, they are fundamentally different for these types of investors. Knowing the differences and risk levels is particularly important. There are plenty of good books available that you can read for in-depth discussions.
I’ve also provided valuable and insightful statistics about these types of investors.
There are also other investor types not discussed in this post, like Angel Investors or venture capitalists. These investors primarily invest in private companies for private equity (often preferred stock as opposed to common stock). This is usually not something that is easily accessible to everyone.
Disclaimer: The information in this blog post should not be considered investment. It is solely provided for informational purposes. Please consult with a financial advisor for any specific questions on your finances. Also, none of the mentioned stocks are to be understood as recommendations. Don’t buy yourself something solely based on what you read here.
Finding a good financial advisor is not easy. I recommend the Garrett Planning Network, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network. These networks can get you in contact with a fee-only advisor. No matter how much money we are talking about, it will not change your costs.