Investor

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An investor is a person that allocates capital with the expectation of a future financial return. [1] Types of investments include: equity, debt securities, real estate, currency, commodity, token, derivatives such as put and call options, futures, forwards, etc. This definition makes no distinction between the investors in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors. An investor who owns a stock is a shareholder.

Stock financial instrument

The stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are commonly known as "stocks". A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

Bond (finance) instrument of indebtedness

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.

Security (finance) tradable financial asset

A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages the term "security" is commonly used in day-to-day parlance to mean any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equities and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.

Contents

Essential quality

The assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term "speculation" implies that a business or investment risk can be analyzed and measured, and its distinction from the term "investment" is one of degree of risk. It differs from gambling, which is based on random outcomes. [2] [ full citation needed ]

Gambling Wagering of money on a game of chance or event with an uncertain outcome

Gambling is the wagering of money or something of value on an event with an uncertain outcome, with the primary intent of winning money or material goods. Gambling thus requires three elements to be present: consideration, risk (chance), and a prize. The outcome of the wager is often immediate, such as a single roll of dice, a spin of a roulette wheel, or a horse crossing the finish line, but longer time frames are also common, allowing wagers on the outcome of a future sports contest or even an entire sports season.

Investors can include stock traders but with this distinguishing characteristic: investors are owners of a company which entails responsibilities. [3]

Types of investors

There are two types of investors, retail investors and institutional investors:

An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include banks, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments.

Retail investor

Trust law three-party fiduciary relationship

A trust is a three-party fiduciary relationship in which the first party, the trustor or settlor, transfers ("settles") a property upon the second party for the benefit of the third party, the beneficiary.

Collecting purposefully gathering items

The hobby of collecting includes seeking, locating, acquiring, organizing, cataloging, displaying, storing, and maintaining items that are of interest to an individual collector. Collections differ in a wide variety of respects, most obviously in the nature and scope of the objects contained, but also in purpose, presentation, and so forth. The range of possible subjects for a collection is practically unlimited, and collectors have realised a vast number of these possibilities in practice, although some are much more popular than others.

Institutional investor

Venture capital start-up investment

Venture capital (VC) is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. Because startups face high uncertainty, VC investments do have high rates of failure. The start-ups are usually based on an innovative technology or business model and they are usually from the high technology industries, such as information technology (IT), clean technology or biotechnology.

Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded.

Business Organization undertaking commercial, industrial, or professional activity

Business is the activity of making one's living or making money by producing or buying and selling products. Simply put, it is "any activity or enterprise entered into for profit. It does not mean it is a company, a corporation, partnership, or have any such formal organization, but it can range from a street peddler to General Motors."

Investors might also be classified according to their styles. In this respect, an important distinctive investor psychology trait is risk attitude.

Investor protection

The term "investor protection" defines the entity of efforts and activities to observe, safeguard and enforce the rights and claims of a person in his role as an investor. This includes advice and legal action. The assumption of a need of protection is based on the experience that financial investors are usually structurally inferior to providers of financial services and products due to lack of professional knowledge, information or experience. Countries with stronger investor protections tend to grow faster than those with poor investor protections. Investor protection includes accurate financial reporting by public companies so the investors can make an informed decision. Investor protection also includes fairness of the market which means all participants in the market have access to the same information.

Through government

Investor protection through government involve regulations and enforcement by government agencies to ensure that market is fair and fraudulent activities are eliminated. An example of a government agency that provides protection to investors is the U.S. Securities and Exchange Commission (SEC), which works to protect reasonable investors in America. [1]

As individuals

Investor protection through individual is the strategy that one utilizes to minimize loss. Individual investors can protect themselves by purchasing only shares of businesses that they understand, or only those that remain calm through market volatility.

An individual investor may be protected by the strategy he uses in investment. The strategy includes an appropriate price of the stocks or assets in the right time he enters. It's hard to fix what "an appropriate price" is, and when it is appropriate because no one makes a purchase or a sale absolutely in his most favorable situation. However, determination may be made when the price of such share or assets are "undervalued" comparing to its potentiality. This is called the margin of safety where an investor can feel at ease when the price of the stocks is alarmingly down.

Investment tax structures

While a tax structure may change, it is generally accepted that long-term capital gains will maintain their position of providing an advantage to investors. This is countered by the opinion that after-tax returns should be considered, especially during retirement, on the basis that allocation to equities is in general, lower, than any returns and should be maximized, to the most lucrative extent. In the current circumstances, long-term capital gains offer one of the best opportunities in the United States tax structure.

It is made easier for investors to generate long-term capital gains by the employment of exchange-traded funds (ETFs), the process of investment in broad-based index funds, without required indicators. Although some outlandish ETFs could provide investors with the opportunity to venture into previously inaccessible markets and employ different strategies, the unpredictable nature of these holdings frequently result in short-term transactions, surprising tax equations and general performance results issues.

Company dividends are paid from after-tax profits, with the tax already deducted. Therefore, shareholders are given some respite with a preferential tax rate of 15% on "qualified dividends" in the event of the company being domiciled in the United States. Alternatively, in another country having a double-taxation treaty with the USA, accepted by the IRS;. Non-qualified dividends paid by other foreign companies or entities; for example, those receiving income derived from interest on bonds held by a mutual fund, are taxed at the regular and generally higher rate of income tax. When applied to 2013, this is on a sliding scale up to 39.6%, with an additional 3.8% surtax for high-income taxpayers ($200,000 for singles, $250,000 for married couples). [4]

Discipline

A disciplined and structured investment plan prevents emotional investing which can be related to impulsive buying. This factor can be utilized to counteract the sentiments of a marketplace, which is often reflective of the emotional state of an entire population. Short-term activity in stock prices or the broader markets can frequently be compared to impulsive actions. This is seen in the term "bull run" which can induce investors to leap into an investment, as opposed to a "bearish market" that could influence a "sell-off". It is these types of market scenarios that can cause investors to abandon their investment strategies. Investor discipline is the ability to maintain an investment strategy even in the most tempting, or extreme conditions in the marketplace.

An established and popular method for stock market investors is Systematic Investment Plans (SIPs) especially for those who have a regular, monthly surplus income. The provision for reaping maximum benefits from these plans is that a disciplined strategy is maintained, one of the foremost advantages for a successful investor. Consistency is closely associated with an investment strategy and can be related to various, adopted, proven techniques; for example, predicting outperforming funds, valuation, or a technical strategy. A strategic advantage that meets the required consistency is long-term investment, which in turn, offers investors long-term capital gains tax advantages. While many investors try to exercise a long-term disciplined approach, the investment marketplace can provide various, tempting options; for instance, a sudden drop in the marketplace, or a pending worldwide event. This is particularly prevalent for retired investors, who are preserving their capital with care.

Constant advantage for retirees

In general, core indexes remain constant making it unnecessary for investors to move from one to another. Although an investor could transfer holdings; despite a maturation of the companies and their markets; a large-cap exchange-traded fund would never require being switched for a similar holding. A large-cap ETF will always remain so and an investor will usually want to retain at least a part allocation to large-cap equities in their portfolio.

It is consistency that is a significant advantage for ETF investors and one that makes it convenient to retain investment positions and benefit from long-term capital gains tax. Despite a potential reduction in the capital gains tax advantage, it is an advantage that should continue to provide some positive benefits in producing after-tax returns. This is a factor that could become an important issue in the future as taxes increase, affecting the lifestyles of retirees. It can be added to by additional taxes generated in short-term trading, exacerbating the situation, due to normal income-tax rates increases.

Role of the financier

A financier ( /fɪnənˈsɪər, fə-, -ˈnæn-/ ) [5] [6] is a person whose primary occupation is either facilitating or directly providing investments to up-and-coming or established companies and businesses, typically involving large sums of money and usually involving private equity and venture capital, mergers and acquisitions, leveraged buyouts, corporate finance, investment banking, or large-scale asset management. A financier makes money through this process when his or her investment is paid back with interest, [7] from part of the company's equity awarded to them as specified by the business deal, or a financier can generate income through commission, performance, and management fees. A financier can also promote the success of a financed business by allowing the business to take advantage of the financier's reputation. [8] The more experienced and capable the financier is, the more the financier will be able to contribute to the success of the financed entity, and the greater reward the financier will reap. [9] The term, financier, is French, and derives from finance or payment.

Financier is someone who handles money. Certain financier avenues require degrees and licenses including venture capitalists, hedge fund managers, trust fund managers, accountants, stockbrokers, financial advisors, or even public treasurers. Personal investing on the other hand, has no requirements and is open to all by means of the stock market or by word of mouth requests for money. A financier "will be a specialized financial intermediary in the sense that it has experience in liquidating the type of firm it is lending to". [7]

Perceptions

Economist Edmund Phelps has argued that the financier plays a role in directing capital to investments that governments and social organizations are constrained from playing:

[T]he pluralism of experience that the financiers bring to bear in their decisions gives a wide range of entrepreneurial ideas a chance of insightful evaluation. And, importantly, the financier and the entrepreneur do not need the approval of the state or of social partners. Nor are they accountable later on to such social bodies if the project goes badly, not even to the financier's investors. So projects can be undertaken that would be too opaque and uncertain for the state or social partners to endorse. [10]

The concept of the financier has been distinguished from that of a mere capitalist based on the asserted higher level of judgment required of the financier. [11] However, financiers have also been mocked for their perceived tendency to generate wealth at the expense of others, and without engaging in tangible labor. For example, humorist George Helgesen Fitch described the financier as "a man who can make two dollars grow for himself where one grew for some one else before". [12]

Guidelines of specific investors

Specific investment practices are suggested to maintain an ethical behavior based on principles universally accepted. [13] .

Socially responsible investing

Socially responsible investing is recommended in all types of investment.

See also

Further reading

Related Research Articles

Finance Academic discipline studying businesses and investments

Finance is a field that is concerned with the allocation (investment) of assets and liabilities over space and time, often under conditions of risk or uncertainty. Finance can also be defined as the art of money management. Participants in the market aim to price assets based on their risk level, fundamental value, and their expected rate of return. Finance can be split into three sub-categories: public finance, corporate finance and personal finance.

To invest is to allocate money in the expectation of some benefit in the future.

Equity (finance) difference between the value of the assets/interest and the cost of the liabilities of something owned

In accounting, equity is the difference between the value of the assets and the value of the liabilities of something owned. It is governed by the following equation:

An index fund is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. Those rules may include tracking prominent indexes like the S&P 500 or the Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allows for greater tracking error, but lower market impact costs. Index funds may also have rules that screen for social and sustainable criteria.

A closed-end fund (CEF) or closed-ended fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds, new shares in a closed-end fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.

A "fund of funds" (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment. A fund of funds may be "fettered", meaning that it invests only in funds managed by the same investment company, or "unfettered", meaning that it can invest in external funds run by other managers.

Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve a reasonable gain in financial return while delivering social impact to the world. It deviates from the traditional venture capital model, which focuses on simple risk and reward. However, there are various organizations, such as venture philanthropy companies and nonprofit organizations, that deploy a simple venture capital strategy model to fund nonprofit events, social enterprises, or activities that deliver a high social impact or a strong social causes for their existence. There are also regionally focused organizations that target a specific region of the world, to help build and support the local community in a social cause.

A venture capital trust or VCT is a tax efficient UK closed-end collective investment scheme designed to provide venture capital for small expanding companies, and income and/or capital gains for investors. VCTs are a form of publicly traded private equity, comparable to investment trusts in the UK or business development companies in the United States. VCTs tend to have a minority stake in the businesses they invest in, as opposed to private equity investing, where a majority stakeholder position is held.

Core & Satellite Portfolio Management is an investment strategy that incorporates traditional fixed-income and equity-based securities known as the "core" portion of the portfolio, with a percentage of selected individual securities in the fixed-income and equity-based side of the portfolio known as the "satellite" portion.

Financial market participants

There are two basic financial market participant categories, Investor vs. Speculator and Institutional vs. Retail. Action in financial markets by central banks is usually regarded as intervention rather than participation.

Baird (investment bank)

Robert W. Baird & Co. is an American multinational independent investment bank and financial services company. It is the principal U.S. operating subsidiary of Baird, an international, employee-owned financial services firm providing investment banking, capital markets, private equity, wealth management, and asset management services to individuals, corporations, institutional investors, and municipalities.

Alternative investment

An alternative investment or alternative investment fund (AIF) is an investment or fund that invests in asset classes other than stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, carbon credits, venture capital, film production, financial derivatives, and cryptocurrencies. Investments in real estate, forestry and shipping are also often termed "alternative" despite the ancient use of such real assets to enhance and preserve wealth. In the last century, fancy color diamonds have emerged as an alternative investment class as well. Alternative investments are to be contrasted with traditional investments.

A Business Development Company ("BDC") is a form of unregistered closed-end investment company in the United States that invests in small and mid-sized businesses. This form of company was created by Congress in 1980 as amendments to the Investment Company Act of 1940. Publicly filing firms may elect regulation as BDCs if they meet certain requirements of the Investment Company Act.

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". Impact investments provide capital to address social and/or environmental issues.

Entrepreneurial finance is the study of value and resource allocation, applied to new ventures. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the startup; and how should funding contracts and exit decisions be structured.

Do-it-yourself investing

Do-it-yourself (DIY) investing, self-directed investing or self-managed investing is an investment approach where the investor chooses to build and manage his or her own investment portfolio instead of hiring an agent, such as a stockbroker, investment adviser, private banker, or financial planner.

References

  1. 1 2 Lin, Tom C.W. (2015). "Reasonable Investor(s)". Boston University Law Review. 95 (461): 466.
  2. Barron's
  3. "Looking at Corporate Governance from the Investor's Perspective". Sec.gov. April 21, 2014. Retrieved 22 April 2014.
  4. "Investment Tax Basics for All Investors". Investopedia.com. Retrieved 30 December 2014.
  5. American Heritage Dictionary
  6. Longman Dictionary of Contemporary English
  7. 1 2 Xavier Freixas, Jean-Charles Rochet, Microeconomics of Banking (2008), p. 227.
  8. Hans Landström, Handbook of Research on Venture Capital (2007), p. 202.
  9. Edwin H. Neave, Modern Financial Systems: Theory and Applications (2009), p.8,
  10. Edmund S. Phelps (October 10, 2006). "Dynamic Capitalism" (PDF). Europa-Institut.
  11. Sterling Elliott, ed., Good Roads: Devoted to the Construction and Maintenance of Roads (1896), Vol. 24, p. 366.
  12. George Fitch, Vest Pocket Essays (1916), p. 123.
  13. "Investing as a Christian: Reaping where you have not sown by Paul Mills - Jubilee Centre". 17 June 1996.