Characteristics of the Types of Investor in Stock Market
The key to successful investing is chalking out an investment strategy that is in sync with your risk appetite. Simply put, your risk appetite is your tolerance to bear losses. Your risk appetite may be low, medium or high. Therefore, to begin investing, you need to understand your risk appetite first to understand what type of an investor you are. This is what will determine your investment profile and help you achieve your financial goals.
There are different types of investor profiles hence, while each individual has a different investment profile and investment preferences, it is easy to classify investors into three broad categories based on the amount of risk they are willing to take.
Here are the three types of investors based on their risk tolerance:
The conservative investor
The first and foremost concern of this type of investor is the protection of his capital. He is unable to bear any erosion of the principal amount he has invested. This makes him a low-risk investor who will probably get sleepless nights during a volatile period in the markets.
What he prefers
A low-risk investor is therefore likely to be happy investing in debt instruments. Since he is not aggressive in his expectations, he does not mind the likelihood of moderate capital growth with steady returns.
The balanced investor
This is someone who is willing to take a little more risk to enhance the value of his portfolio. He will thus have more tolerance for volatility than a conservative investor, but will not be willing to invest in high-risk instruments for greater returns.
What he prefers
A medium-risk investor seeks a balance between stability and growth. His portfolio will consist a mix of debt for stability and equity-oriented instruments that invest in stable companies.
The aggressive investor
As the name suggests, this is an investor who can take the market’s short-term volatility in his stride. He is not afraid to expose his portfolio to high risk in pursuit of higher growth. The essential difference between an aggressive investor and low and medium risk investors is that he is willing to take greater risk.
What he prefers
An aggressive investor is willing to expose his portfolio to high risk instruments in the equity markets and may even bet on unknown companies to further enhance the value of his portfolio. Such investors with a competitive investor profile are also willing to opt for leveraged products such as derivatives of equities and other asset classes.
To identify your investor profile it is important to determine what kind of an investor you are before you embark on your investment journey. It is important to bear in mind that wealth creation is a time-consuming process and staying invested will bear fruit if you have time on your side. Thus, it is wise to invest according to your own risk profile. This is what will take you closer to your financial goals.
The best part about different investor types is that every individual begins as a novice and gradually progresses to the next consecutive level of investment accomplishment through training and knowledge.
Irrespective of the type of investor you are currently, moving on to the next level is not too far, and can be easily done with a little practice and education.
What is the key to being an experienced investor? As can be seen from various examples around us, the most successful investors have excellent temperament that has helped them consistently outperform the market. They can do this not because of perfect timing or hordes of cash. They do it by distinguishing their instinctive tendencies, established methods, doctrines, and laying down a disciplined plan of action.
Taking a cue from Warren Buffett, he says, "Success in investing is not associated with one's I.Q." At the end of the day, what one needs is the temperament to restrain impulses that usually get most people into trouble.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.