Types of investors in the stock market: The four main types of investors – passive, income, growth, and speculator. It depends on risk tolerance and time frame.
There are many different ways to make money by investing in the stock market.
But ultimately, there are only four types of investors in the stock market.
Depending on an investor’s risk tolerance and investment goals, they can be classified under a specific investment strategy.
In this post, I will show you the four different types of investors in the stock market.
Let’s take a look.
Types Of Investors In The Stock Market
Although there are four main types of investors in the stock market, it should be noted that different investment strategies can be blended together.
After all, investing is mostly about managing risk.
An example of blending could be 80% dividend growth investor, 10% growth stocks, and 10% index funds.
Furthermore, value investing is not included as an investment strategy because any good investor is already a value investor.
Whether you are a growth investor or dividend investor, you should be trying to buy stocks at reasonable valuations.
Buying stocks when they are undervalued is the best way to maintain a margin of safety.
Nevertheless, here are the four main types of investors in the stock market:
Passive Investors (Index Funds, ETFs, Mutual Funds)
Passive investors are the most common types of investors in the stock market nowadays.
In short, passive investing refers to a buy-and-hold strategy over a long investment time frame.
It is a low involvement strategy that requires little to no investment research and minimal trading.
Index Investing
The most common form of passive investing is index investing. Index investors will purchase an index fund or ETF that follows the performance of a group of stocks, such as the . A few examples of ETFs to purchase are SPDR, VOO, or VSP if you want a CAD-hedged option.
The main benefits of passive index investing are that it’s a low-cost strategy and you don’t have to complete any analysis. It’s the lazy way to invest.
Frankly, it’s the best option for passive investors, because of the low fees. The will outperform most investors that try to invest for themselves.
The perfect example of how index investors outperform can be observed by looking at the one-year return of the S&P 500. If you invested in the S&P 500 back in March 2020, you would be up by 56% right now.
Mutual Funds and ETFs
Alternatively, passive investors can invest in ETFs or Mutual funds.
Although these types of investments are more actively managed by professionals, they are still passive for the investors.
Instead of analyzing a Canadian bank stock and trying to choose which one is best, a passive investor will buy FIE, which is an ETF that follows the performance of all the Canadian banks.
If passive investors want to avoid making decisions altogether, they can purchase mutual funds by contacting their bank. Trained mutual fund advisors will perform a risk tolerance and assessment and make mutual fund recommendations based on the assessment.
Of course, the downside to mutual funds is that they come with higher MER (management expense ratio) fees. Personally, I think paying a 2% fee on something that earns you 7% annually is still better than earning a negative return on cash.
Income Investors (REITs, Dividend Growth Stocks, Bonds)
Income investors seek income from their investments.
They look for investments such as REITs (real estate investment trusts), dividend growth stocks, or bonds to pay them distributions, dividends, or interest.
Frankly, income investing is an extremely overlooked investment strategy because it takes advantage of compound interest.
As income from investments rolls in, income investors are able to reinvest it into more income-generating assets.
If investors are closer to retirement, they can live off the income and avoid selling the principal.
In regards to the different types of income investors, essentially, there are dividend investors and interest investors.
Dividend Investing
Dividend investors focus on acquiring dividend growth stocks and REITs. In comparison to passive investing, dividend investing requires more effort. Successful dividend investors must read quarterly reports and analyze the stocks they own.
But the extra effort comes with many advantages, such as more frequent distributions, the possibility of superior returns, and predictable dividend growth.
Personally, predictable dividend growth is the main reason that I prefer dividend growth investing over index investing. When a company raises its dividend, my dividend income is immediately higher. Therefore, a dividend growth investor’s returns actually get better with time. Whereas, if a stock in an index increases its dividend, the distribution may only be paid out once per year. Over time, dividend growth investing can produce incredible results.
— Dividend Growth Investor (@DividendGrowth) March 15, 2021I love these stories
380% yield on cost on an investment in $RY made around 45 – 50 years ago
This means that you get your cost back every 2.5 months in dividends alone
And you still own a 100-bagger stock worth over $3M https://t.co/8PXEzUA5gV pic.twitter.com/X7YFSStOoG
Interest Income
Besides dividend investing, income investors can also look for interest-paying investments. However, in the current environment, it is unlikely that any interest-paying investments will be worth your money.
In the words of Ray Dalio:
“The economics of investing in bonds (and most financial assets) has become stupid,” – Ray Dalio via Yahoo Finance
Anyways, if they must, interest investors could attempt to earn interest with savings accounts, bonds, treasury bills, or GICs.
Growth Investors (Growth Stocks)
Growth investors have the highest risk tolerance of all the types of investors in the stock market.
In short, growth investors attempt to maximize their returns by investing in the fastest growing companies.
Please do not get growth investing mixed up with speculating, though.
Growth investors do not just buy stocks because they think are going up fast. Smart growth investors don’t buy garbage like GameStop.
Intelligent growth investors buy stocks in new industries that have disruptive technologies.
Moreover, they buy stocks that are rapidly growing their annual revenue.
Because most growth stocks reinvest profits for growth, they usually do not pay a dividend.
Sometimes growth stocks are not even profitable for years.
But investors of growth stocks do expect the companies to be profitable at some point in the future.
The downside to growth stocks is that they can be difficult to value, because they usually trade at a premium.
Additionally, they are much more volatile. So, growth investors must have a high risk tolerance and a long investment time frame for the investment to pay off.
Speculators (Traders and Gamblers)
To be clear, speculators are not investors.
I only included speculators on this list to illustrate a point.
Speculators buy and sell stocks only because they think the price will go up and someone else will pay a higher price in the future.
They usually attempt to make money fast.
They do things like day trading, buying stocks based on a tip, predicting the markets, or failing to manage risk.
While it is true that speculators do have lucky streaks, and they occasionally catch the right bull markets, what separates a speculator from an investor is consistency.
Basically, they just guess.
In truth, speculators are no different than gamblers.
Types Of Investors In The Stock Market – Final Thoughts
The reality is that there are only three types of investors in the stock market:
- Passive investors
- Income investors
- Growth investors
The type of investor you choose to be should depend on your risk tolerance and investment time frame.
Investment styles can also be blended to suit individual investment goals and comfort level.
If you can’t handle volatility, it’s better to choose defensive dividend stocks or passive investment options.
Alternatively, if you want to maximize your returns and you have a long investment time frame, you will make the most money by investing in growth stocks.
If you want to do nothing, become a passive investor and just buy the S&P 500. You won’t even have to do any research.
Finally, if you are a speculator, you should learn how to invest and keep your speculation to less than 10% of your portfolio.
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Best Growth Stocks: 4 Stocks That Could Make You Rich (2021)
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