Who are Investors?
Investors are individuals or organisations that show a pecuniary/financial interest in a startup or an existing business. They usually pool in a large amount of their assets as capital (in the form of cash, physical assets, patents, and goodwill) willingly with the expectations of high returns from the business, in a defined future. Usually, this ‘defined future’ is more than a year, and may even last upto 15-20 years. However, the idea of investments in new businesses is a high-risk activity, since there is no fixed guarantee of returns.
An investor approaches different businesses through different channels. The primary channel is by means of purchasing pre-listed shares of a company. Though in high denominations, pre-listed shares are said to be highly valuable and returns-intensive if an invested business entity shows success in its business idea and execution. The returns are further exponentiated when the successful business gets itself registered for an IPO in the Secondary Capital (Stock) Market.
When the volume of purchases increases, the share prices tend to flare higher due to high demand. Once the investor feels that they have achieved their target of returns, they withdraw their stake from the total investment. Usually, these targets fly up to 5000-6000% of their initial investments. Since the rewards of initial investments are high, many investors, with different motives and targets, invest in large numbers in emerging businesses, such as 20-30% of the total capital requirement of the business. These are mostly executed by financial institutions and angel investors. However, retail investors generally do not invest in more than 0.0001-0.01% of the total market cap of businesses.
Other channels of investments include ETFs, commodities, real estate, mutual funds, and Cryptocurrencies. The corresponding volumes of these investments are significantly lower compared to the initial investment value(s). Hence, these are opportunities for retail investors that are sought after, worldwide. Among retail investors, there are groups that execute this as their way of earning income – buy and sell investments on the same day (intraday) – while for others it is a means of earning passive income. Therefore, it is an alternate route to earning income; investors put their money into the market and wait for long-term returns, which can go up to about 10 to 15 or even 25+ years.
In the last few decades, stocks and mutual funds have been better income and returns generators compared to the interest rates offered by commercial banks on Fixed Deposits (FDs). It helps tackle the growing inflation rate by providing relatively higher returns, while FDs carry interest rates that are lower than the inflation rate, thereby reducing the real income generated. Thus, many individuals have entered the stock market in the last two decades. However, equities and mutual funds do not guarantee returns, unlike FDs.
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What are the different categories of Investors?
- Active Investor – An active investor seeks investment opportunities regularly and invests when the markets drop due to global cues, such as a pandemic or global recession period. They check the markets every now and then to identify entities in the Real Estate, Finance, FMCG, and Defence domains to generate high returns in the medium and long terms. The different routes of investment are the stock market, cryptocurrency, mutual funds, foreign currencies, and Gold.
- Passive Investor – A passive investor focuses only on the long-term returns of an investment and thus puts a huge amount of investment initially, and does not check its status regularly; rather they are confident that their investments would grow over a period of 10-20 years. Some examples of passive investors are the individuals who purchase shares worth Rs. 50,00,000 and add on more investment after 8-10 months, and withdraw the entire share of capital only after 10-15 years, after it appreciates by 20-50%.
Also Read: Debt Vs Equity Financing: Which Is Best For Small Business?
What are the different types of Investors in the business world?
- Angel Investors – Angel investors provide capital to relatively undeveloped companies in exchange for ownership stakes. In contrast to venture capital corporations, angel investors use their own personal wealth. Angel investors may be more patient with business owners than venture capitalists and may be willing to contribute smaller amounts of funding over a longer period of time. They are looking for a means to get their money back, typically in the form of an IPO or an acquisition.
- P2P Lenders – P2P lenders are private investors who seek a higher return on their money than they can get from FDs at a bank. Borrowers through peer-to-peer platforms are looking for an alternative to banks or lower interest rates. The default rate for peer-to-peer loans is significantly higher than the rate for traditional loans.
- Personal Investors – Personal Investors are individuals who put their money into enterprises in exchange for ownership interests. They also invest their own money in one’s company and have a financial stake in its success or failure.
- Investment banks – Investment banks offer a variety of services, including research, trading, underwriting, and mergers and acquisitions advice. When a company engages in proprietary trading, it is trading with the company’s own capital. Investment banks earn commissions and fees from the initial public offerings of bonds and stocks.
- Venture Capitalists – Venture capitalists are investors who invest money in companies in exchange for a share of the company’s ownership. This could involve providing financial support to new businesses in their early stages of development or assisting smaller businesses in expanding without access to equity markets.
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Investors approach firms in different ways, primarily through pre-listed company shares. Pre-listed shares are regarded to be valuable if the invested business succeeds in its vision and execution. When a successful business files for an IPO on the Secondary Capital (Stock) Market, returns are multiplied for the initial investors (who invested before listing). When demand for the stock increases, the corresponding share price rises.
When an investor reaches their return goal, they withdraw their stock. Since initial investments yield substantial returns, many investors contribute 20-30% of a startup’s total capital. Financial institutions and angel investors generally execute this. Investments such as ETFs, commodities, real estate, mutual funds, and cryptocurrencies are much smaller than their initial value(s). These are globally-desired opportunities for retail investors. Some retail investors buy and sell investments on the same day (intraday), while for others it’s a passive income source. It’s an alternative way to make money, and investors place their money in the market and wait for long-term returns (10-15 or 25+ years).