Types of Investors in the Stock Market

Types of Investors

The minute we think of an investor…all we think about is a fellow retail investor. However, retail investors only own 6% stake in the Indian stock markets. Many people stay out of the investing game, because they find it intimidating. But finding out the types of investors that contribute in the market could get you much ahead in the game.  In this article we will learn:
  • Type of investors grouped by investment category
  • Type of investors grouped on basis of their investment styles 
  • Types of investors based on their risk appetite

1. Investors grouped by investment category

type of Investors The doughnut shows Indian stock market stake holding. The beauty of the Indian stock market is the diverse types of investors in the market. Let’s dive deeper into different types of investors, and find out which segment you belong to. Retail investors are individuals investing in the capital markets. Their goal is to invest their savings to get better returns. Securities Exchange Board of India (SEBI) defines retail investors as individuals whose application size in initial public offerings (IPO) is less than Rs 2 lakhs.  Retail investors only own 6% stake in the Indian markets. These types of investors are generally vulnerable as they are uninformed. Retail investment pie is growing after demonetisation as household savings were diverted to financial markets. Covid 19 related lockdown led to an increase in participation of retail investors in the Indian stock markets.  The number of demat accounts opened in the last few years have sharply increased. If you still don’t have a demat account yet then simply click here to open it in 15 minutes. 

 High Networth Individuals (HNIs)

Investors’ with over two crores of investible assets are generally considered as HNIs. Net worth is the amount by which your assets exceed liabilities. Individuals with investible assets of more than Rs.25 lakhs to Rs.2 crores are considered as emerging HNIs’.  For the IPO application HNIs need to apply through a separate category. The number of HNIs in India is predicted to touch 950,000 by 2027 according to wealth report. Currently the HNI’s in India have crossed 330,000 as per 2020.

Domestic institutional investors (DII) 

These institutional investors generally make investments in country they are based in. There are four main types of DIIs in the Indian stock markets. DIIs can either be:  1. Indian asset management companies (AMC) These are Indian mutual funds that pool huge sum of money from individual investors and make investments. These investments are headed by fund managers. Mutual funds buying and selling creates impact on the stock prices and overall markets. Example: HDFC AMC, ICICI Prudential AMC, Nippon Asset Management and UTI AMC, Aditya Birla Sun Life AMC. 2. Indian insurance companies Insurances companies like LIC, New India Assurance, Star Health, HDFC Life, ICICI Pru life, SBI Life  too make some percentage of investments in stock markets.  3. Pension funds Pension funds are funds that provide financial support, that is much needed during retirement years. HDFC, SBI, Kotak have some well-known pension funds in India. 4. Banks Scheduled commercial banks also invest a small portion of the deposits they receive in the stock market. DIIs own a substantial stake in listed companies in India. They are an important component in the Indian stock markets. 

Foreign Institutional investors (FIIs) or Foreign Portfolio Investors (FPI)

These institutions are established outside India and make investments in India. FIIs are registered foreign institutions like:
  • Pension funds and mutual funds
These funds are an investment vehicle created for various purposes. A pension fund specifically addresses retirement needs. While a Mutual funds is for foreign investors to invest in emerging economies. Foreign investors seeking greater returns adjusted risk invest in overseas funds. These investments are fluxed into our economy through stock market. Ex Vanguard in one of the largest mutual funds which invests in India.
  • Sovereign wealth funds
These are government owned investment funds. Surplus reserves are one of their popular sources of funding. The benefits of fund’s investment are used for the citizens of that sovereign nation. Ex: Government of Singapore has large investments in Indian equity market. 
  • Hedge funds
Hedge funds invest and trade in offshore markets. These are established using borrowed capital. Hedge funds use complex trading and portfolio construction techniques. They aim to maximise investor returns. These are the kind of mutual funds for aggressive investors. Ex Bridgewater Associates is one of the world’s largest hedge funds. FIIs and FPIs influence growth of country’s economy. They determine the inflow of funds in a country. If FIIs invest huge amounts it mirrors confidence and healthy investment sentiments for Indian stock markets. Indian government appreciates foreign investment in Indian industries. FIIs own 24% stake in the Indian markets. Every time these big players buy securities the market moves upward. Such events boost investors’ confidence. 

2. Type of investors grouped on basis of their investment styles

Investment styles can broadly be divided into:
  • Value investors are investors who seek to find undervalued stocks. Their aim is to find fundamentally good stocks that trade at low price to earnings ratio (P/E). These investors look forward to appreciation in the value of their investments. Value investors usually are long-term investors. 
  • Growth Investors are inclined towards growth stocks. They invest in companies that are typically young and at an early growth stage. Return rate of such stocks are expected to rise above average market rate. A growth investor seeks accelerated growth in short period of time. Such investors are less concerned with current pricing. They lay more emphasis on the underlying business of the stock.
  • Special Situation Investors are individuals who invest in companies where corporate actions like mergers, acquisition and takeovers are happening. These types of investors are inclined towards recent news. They tend to track stock markets closely when they are invested.

Watch our episode on Special Situation Investing with Jimeet Modi

  • Traders are individuals who speculate on the stock prices of the company. They are looking to make quick returns by buying and selling stocks frequently. Their holding periods are generally shorter than investors. They could exit their positions in a few hours to a couple of days or weeks. 

 3. Types of investors with different risk appetite

Well, investors often think about how much returns their investment will generate. But the real question is – How much are you okay with losing on an investment? This is what they call risk appetite. Risk appetite refers to amount of loss an investor can handle while investing. An investor can afford to take risk on the basis of:
  • age factor, 
  • family dependency, 
  • financial plan and goals
  • investor’s comfort level etc.
  • Awareness of financial products 
Knowing risk appetite helps an investor plan their portfolio better. Risk drives - how the investor invests, manages their investments. Here are types of investors with different risk appetite:

1. Aggressive Investors

Such investors are fairly experienced with ability to take high risk. These investors usually have a large portfolio. They normally trade in high-risk high reward instruments like futures and options. A well-diversified portfolio across all asset classes may support an aggressive investment appetite. One of the key threats to an aggressive investor is that they could panic in times of crisis. 

2. Moderate Investor

A moderate investor prefers investing in less risky investment options. However, these types of investors take some risk according to their tolerance. They hold investments across different asset classes.  A balanced approach helps investors gain decent rewards for the risk they take. Such investors can suffer losses during a market crash. They can offset losses in market by diversifying into other assets like gold or debt funds etc.

3. Conservative investor

The primary focus of a conservative investor is capital preservation. They don’t crave to earn high returns. Hence, they prefer investing in fixed deposits, public provident funds, etc.   Conclusion  There is no one size fits all when it comes to investments. It is important for an investor to analysis their risk tolerance, investment style and decide the type of investor he is. Once you figure out the type of investor you are, the next step is to invest in suitable investment options. But picking the right investments can get overwhelming.  Hence, asking yourself a few basic questions and defining your investor type can go a long way. With StockBasket you can get expert-curated portfolio according to your risk appetite, needs and goals. Here’s a look at the best StockBaskets – Now that we have simplified the types of investors for you, you can easily decide your type and start investing right away. Open a three in one free Samco demat account in 10 minutes.

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