What Is an Investor?
An investor is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns. Investors rely on different financial instruments to earn a rate of return and accomplish important financial objectives like building retirement savings, funding a college education, or merely accumulating additional wealth over time.
A wide variety of investment vehicles exist to accomplish goals, including (but not limited to) stocks, bonds, commodities, mutual funds, exchange-traded funds (ETFs), options, futures, foreign exchange, gold, silver, retirement plans, and real estate. Investors can analyze opportunities from different angles, and generally prefer to minimize risk while maximizing returns.
Passive vs. Active Investors
Investors may also adopt various market strategies. Passive investors tend to buy and hold the components of various market indexes, and may optimize their allocation weights to certain asset classes based on rules such as Modern Portfolio Theory’s (MPT) mean-variance optimization. Others may be stock pickers who invest based on fundamental analysis of corporate financial statements and financial ratios—these are active investors.
One example of an active approach would be the “value” investors who seek to purchase stocks with low share prices relative to their book values. Others may seek to invest long-term in “growth” stocks that may be losing money at the moment but are growing rapidly and hold promise for the future.
Passive (indexed) investing is becoming increasingly popular, where it is overtaking active investment strategies as the dominant stock market logic. The growth of low-cost target-date mutual funds, exchange traded funds, and robo-advisors are partly responsible for this surge in popularity.
