Different Types of Investors in the Stock Market

Over the past chapters, we’ve established that the stock market is a marketplace, and the investors are the buyers or sellers who fuel the market. Here’s something to blow your mind: if you look at the bigger picture, investors are at the heart of India's financial growth! It is their buying and selling that keeps the money churning, contributing to economic growth. 

Drawing your attention back to investors, anyone who invests is an investor, but not all investors are the same! Let us explain: investors can be of different types based on factors like: 

• Amount of funds they are ready to invest 
• Appetite for risk 
• Financial goals 
• Investment style 
• Time horizon 
• Market knowledge 

Let us help you with some examples. Someone with a lot of money to invest may be able to take more risk (of losing a part or whole of their funds) than someone with a limited amount of money to invest. There are specific terminologies for these types of investors on the basis of risk appetite that we will learn ahead in this module. There might be organisations that are investors and common people like you and me, too, who make investments. There are investment styles that define investors and also the amount of time they make investments for.

We are going to investigate some of these categories and walk you through some investor types.  

1. Types of investors in the stock market by investment category -

• Retail Investors 

Retail investors are small investors. They are regular folk who invest in products in small amounts in expectation of decent returns. What is a small amount in this context? As per SEBI, anyone who applies to an IPO with an amount less than ₹2 lakh is a retail investor. Most retail investors lack adequate knowledge and access to important information, which makes them vulnerable in the stock market. Retail investors constitute a large chunk of market participants in India, and their strength continues to grow. However, given that the investable amount is less, they are not generally market-makers. 

• High-Net-Worth Individuals (HNIs)

The net worth of an individual refers to the difference between their assets and liabilities. HNIs are those who have investable assets worth over ₹2 crore. Those with investable assets of more than ₹25 lakh but less than ₹2 crore are deemed as emerging HNIs. HNIs have a separate category through which they may subscribe to IPOs. 

For high-net-worth individuals (HNIs) eyeing IPO investments, SEBI has tailored the investment landscape with distinct upper limits: the HNI category is bifurcated into S-HNIs (investing ₹2-10 lakhs) and larger HNIs (exceeding ₹10 lakhs), ensuring a diversified and equitable allocation across the spectrum.

• Domestic Institutional Investors (DIIs)

This investor category refers to institutions that are based in India and invest in the country itself. There are many types of DIIs that participate in the Indian stock market, such as asset management companies (AMCs) that pool money from a large base of individual investors and invest it across multiple sectors and financial instruments, insurance companies and pension funds. Scheduled commercial banks too are allowed to invest a small part of their deposits in the stock market, and they, too, are categorised under DIIs. 

• Foreign Institutional Investors (FIIs)

These are institutions situated outside India but invest in the Indian markets. They can impact the overall economic health and sentiment of the country due to the sheer size of their investment. When there are more FIIs investing in the country, it is seen as a positive as it denotes confidence in our nation’s growth story. The reverse often causes panic. 

These organisations can be mutual funds, pension funds, hedge funds, sovereign wealth funds or simply a foreign-registered company with a large fund to invest in India. 

2. Types of investors in the stock market by investment style - 

• Value Investors 

Such types of investors seek stocks that are fundamentally good but are undervalued, as in, their current market price does not seem to reflect their inherent value. The expectation is for the market to realise their worth over time and then the price to shoot up. 

• Growth Investors  

As the name indicates, these investors focus on young companies or those in their early stages with ample potential for growth. They expect these stocks to appreciate in value quickly and provide faster results.  

• Special Situtation Investors  

These investors capitalise on corporate actions like takeovers, mergers, or acquisitions in order to make a profit from their stock investments. 

• Traders 

These types of investors are keen on making quick money. In fact, traders are often considered as a separate category from investors. They constantly speculate about stock prices and can exit their position in just a few weeks, days, or even minutes. Traders or active investors can be further classified in the following ways:

• Day traders:

They buy and sell stocks on the same trading day, thereby profiting from the smallest of price fluctuations. 

• Swing traders:

They look to reap benefits from short or medium swings or changes in the stock price and may retain their position for a few days to a few weeks. 

• Technical traders:

They study price patterns, trends, and charts, as well as technical indicators, before making their buy or sell decisions. 

3. Types of investors in the stock market by risk appetite -

• Aggressive Investors 

Such investors are open to taking higher risks in hopes of higher returns from the stock market. Aggressive investors often chase after quick returns and are willing to bet on market prospects even if there is an equal chance they might lose their capital. 

• Conservative Investors 

A conservative investor is on the opposite end of where the aggressive investor sits. They prefer safer avenues to invest and have the least risk appetite. They are more keen on capital preservation rather than earning high returns. Debt and fixed-income instruments often make up a large part of their portfolio. 

Those who fall on the spectrum between these two ends are said to be investors with moderate risk appetite. Such investors often have a balanced expectation of risk and returns from the markets.

4. Other Types of Investors in the stock market -

Apart from the ones discussed above, there are some other types of investors who fit across multiple categories: 

• Buy-and-Hold Investors:

These investors purchase stocks with the aim of holding them for a long time and ignore market fluctuations that happen in the short run. They are passive players in the stock market.  

• Index Investors:

They invest in index stocks,  funds or Exchange-Traded Funds (ETFs) as they mimic the performance of the chosen market index. This means that they don’t need to track or manage their investment actively. Index investors are also known as passive investors for this reason. 

• Fundamental Investors:

Such investors analyse reports and investigate the performance and financial health of the company and the economy before buying shares.  

• Dividend or Income Investors:

Such types of investors put their money in stocks that generate dividends on a regular basis. 

• Contrarian Investors:

Their strategy is to go against the flow of the market and buy when the trend is to sell. This way, they are able to get stocks when the price is depressed and sell when it rises. 

• Socially-responsible or ethical investors:

They make investment decisions based on social, environmental, and governance factors so that their morals, values, or beliefs are not compromised in the process. For instance, such an investor might choose to avoid investing in businesses that revolve around fossil fuels, tobacco, or fast food. 

Who Invests in a Company Before It Lists on the Stock Exchange? 

Running a company is no mere feat. One constant with all businesses is the need for funds to first set up the business. There are raw material costs, then labour charges, the cost of any equipment, registration charges, utility bills, employee salaries to pay, etc. Who supplies enterprises with the necessary capital during the initial stages? Well, there are three types of investors who help: 

• Friends and Family Members   

They are often the ones who provide businesses with what's called seed money, since family members and friends know the company owner or founder intimately. Interpersonal relationships, mutual trust, and confidence usually drive such investment decisions.

• Angel Investors   

Wealthy private individuals generally play the role of angel investors by providing the necessary funds to a start-up or small business. In return, they enjoy ownership equity or claim to a part of the company’s net assets. Such investors use their money to help the business take off. An angel investor might supply money once or at different intervals and only expects returns if the business’s idea succeeds.  

• Venture Capitalists 

A venture capitalist can be a wealthy private investor or financial institution that sees immense long-term growth potential in a start-up and wants to invest in it. Such investors can provide funds and managerial experience or technological expertise to help a company through its formative years. Unlike angel investors, venture capitalists usually step in after a company has achieved a certain position or stability. In return, they receive an equity stake. Venture capitalists can also earn through management fees and interest on their investments. 

How Investor Types Impact the Stock Market? 

• Effect on Market Volatility 

When you are speculating on the price, any change is bound to make you excited. That’s natural. Speculative investors and those who invest for the short term tend to quickly sell their investments, either to book small gains or to stem their losses. This adds to volatility in the market.  

Dividend or income investors influence market movement closer to or after dividend announcements by companies. Long-term investors and value investors, on the other hand, aren’t bothered by short-term fluctuations. They care more about the long-term income generation potential of their investments. They infuse stability into the market. 

Retail or individual investors generally follow market trends and sentiment or exhibit herd mentality. FIIs and DIIs are market-makers, meaning, they set the tone for market trends due to their large size of investment. Their actions directly affect volatility in the market. FIIs and DIIs often transact through bulk deals and block deals, which are essentially very large trades, either by quantum of money or by number of shares traded. These become influencers of market volatility and sentiment, too.

• Effect on Stock Prices

Institutional investors can impact stock prices to a large extent owing to their substantial capital base. This happens because other investors see their moves as a reflection of the company and find the confidence to trade its shares. This leads to inflation or deflation of the price of the stock. 

While individual investors are not as influential as institutional investors, their collective action can impact stock prices. For instance, as stated above, retail investors might behave like a herd and mimic others like them, causing stock prices to go up or down.  

Conclusion

Now you know the different types of investors active (or passive!) in the stock market in India. Remember that every investor is unique and contributes in their own way to the growth of wealth for themselves and the nation! 

In this chapter, you learnt about the basics of the stock market. In the next chapter, we will be going deeper into the concept of stocks. See you there!