Investing is a key part of building long-term financial stability. But what is an investor? As you dive into this new world, you’ll discover that there are many different types. Although no single type is better than another, it is important to understand the different strategies that you can implement on your way to building long-term wealth.
Today we will define what an investor is and explore the different types that use unique strategies to build bright financial futures.
What is an investor?
An investor is a person or entity that uses capital to make a commitment to an asset with the goal of enjoying a financial reward in the future. As an investor, you can choose from a variety of investments including, stocks, bonds, real estate, and more. Investing also allows you to create multiple sources of income and to build passive income streams.
Unlike building savings in a banking institution, all investors take on some risk. As you build investments, there is a possibility of losing the funds you commit to an asset.
As you consider becoming an investor, remember the words of warning offered by Investor.gov, “No one can guarantee that you’ll make money from your investments, and they may lose value.” However, most investors do their research to find investment opportunities that fit within their risk tolerance. By the way, studies have shown that women are amazing investors!
What are the different types of investors?
All investors are looking for a financial reward in return for their capital commitment. But the type of investments chosen will determine which category an individual falls into.
A pre-investor is someone that isn’t investing yet. In many cases, a pre-investor hasn’t even started to think about investing. Overall, pre-investors may be lacking some financial awareness which could change the trajectory of their lives.
Pre-investors also include individuals that may have started to think about investing. But they haven’t taken action to invest capital into an asset.
Unfortunately, pre-investors are often trapped into the paycheck to paycheck cycle with a pattern of consumption that keeps them at this stage. This also includes lifestyle inflation. Luckily, it is possible to transform your finances from this pre-investment stage completely. However, it will require a mindset shift that many are unwilling or unable to make.
But you can absolutely take action as a pre-investor. Take the time to learn more about personal finance and how to improve your situation. It is a good idea to hold off on moving forward until you have built a comfortable knowledge base. Once you are ready to dive into investing, this period can help you build out a stable financial foundation that will serve you well as an investor.
When you are ready to leap into investing, you’ll likely make your start as a passive investor. Most passive investors take advantage of their tax-advantaged retirement accounts, set up an asset allocation plan to meets their risk tolerance, and invest their savings on a regular basis.
Typically, passive investors don’t have a lot of time to devote to managing their investments. With that, the passive strategy works well. The hallmark of a passive investment is a simple approach to maximizing the returns on your available capital without taking on more risk than you are comfortable with.
A popular choice for passive investors includes index funds of the S&P 500 or investing in passive real estate. Although this strategy is much preferred to not getting started at all, you will be at the whims of the market. Unfortunately, the volatile nature of the market can mimic a rollercoaster ride of your finances. This volatility has led many would-be passive investors to skip the opportunity to grow their wealth.
Although passive investing comes with risks, a long-term buy and hold strategy will often serve its beneficiary well. As a passive investor, you are setting yourself up for long-term financial success. However, passive investors miss out on the more lucrative opportunities provided by a more active approach.
As you’ve probably guessed by now, an active investor is someone that takes a more hands-on approach. Active investors take the time to study the market and learn how to spot opportunities for investment returns.
The exact methods of increasing your investment returns through active investment will vary. But with an active strategy, you would be more interested in making your money work hard for you than working hard for more capital to fund your passive investments.
Active investment can be a good choice for someone with enough time on their hands to learn the ins and outs of market strategies. But if you don’t have a substantial amount of time to commit to this education, it might be a better option to stick with passive investing.
What type of investor should you become?
Now that you know more about the three different types, you are probably wondering which type you should become. There is not a clear winner among the three. The right choice will depend on your financial goals and your risk tolerance.
For example, let’s say you are interested in the stock market and time to commit to learning the ins and outs. In that case, active investing might work out well for you. But if you are working hard to increase your income and have no interest in diving into the nitty-gritty details of investing, then a passive strategy is a better option.
Finally, the pre-investor is an appropriate starting point for many. You can take the time to learn more about your personal finance options. With the information you amass, you can determine how to move your investments forward. But at some point, you should graduate from this phase to build a brighter financial future through some kind of investment strategy.
Not sure where you should start your investment journey? I highly recommend taking our free investing course to help you build out the right investment strategy for your situation. You’ll walk away with the tools you need to move your finances in the right direction.
The bottom line
Now that you understand what an investor is, you’ll hopefully realize that is possible for anyone to become an investor. You don’t need a fancy degree or a ton of cash to get started. In fact, you can start investing with just a little bit of money on hand.