Active Passive Investors
What is an investor?
An investor is any person or other entity (such as a company or a mutual fund) that commits capital with the expectation of receiving financial returns. Investors rely on a variety of financial instruments to earn a rate of return and achieve important financial goals such as building up retirement savings, funding a college education, or simply accumulating additional wealth over time.
There are a wide variety of investment vehicles to achieve goals, including (but not limited to) stocks, bonds, commodities, mutual funds, exchange-traded funds ( ETFs), options, futures, foreign currencies, gold, silver, pensions and real estate. Investors can analyze opportunities from different angles and generally prefer to minimize risk while maximizing returns.
KEY POINTS TO REMEMBER
Investors use a variety of financial instruments to earn a rate of return to achieve their financial goals and objectives.
Investment securities include stocks, bonds, mutual funds, derivatives, commodities and real estate.
Investors differ from traders in that investors take long-term strategic positions in companies or projects.
Investors create portfolios with an active bias that seeks to beat the benchmark or a passive strategy that attempts to track an index.
Investors can also be oriented towards growth or value strategies
An investor is generally distinct from a trader. An investor uses capital for long-term gain, while a trader seeks short-term profit by buying and selling stocks over and over again.
Investors generally generate returns by investing capital in the form of investments in stocks or debt securities. Investments in stocks involve holdings in the form of shares of companies that can pay dividends in addition to generating capital gains. Debt investments can be loans made to other individuals or businesses, or in the form of purchases of bonds issued by governments or businesses that pay interest in the form of coupons.
Understanding Investors
Investors do not form a uniform group. They have different risk tolerances, capitals, styles, preferences and time frames. They are often able to accumulate and pool the money of several small investors (individuals and/or companies) to make larger investments. For this reason, institutional investors often have far greater market power and influence over markets than retail investors.
A distinction can also be made between the terms “investor” and “trader”, as investors typically hold positions for years or even decades (also referred to as “position trader” or “buy and hold investor”), while traders generally hold positions for shorter periods. traders, for example, hold positions for a few seconds. Swing traders, on the other hand, look for positions held for several days to several weeks.
Institutional investors are organizations such as financial companies or mutual funds that constitute large portfolios of stocks and other financial instruments. They are often able to accumulate and pool the money of several small investors (individuals and/or companies) to increase the investment. For this reason, institutional investors often have far greater market power and influence over markets than retail investors.
Passive and active investors
Investors can also adopt a variety of market strategies. Passive investors tend to buy and hold components of various market indices and can optimize their allocation weights to certain asset classes based on rules such as Modern Portfolio Theory Optimization (MPT). Others may be stock pickers who invest based on fundamental analysis of companies balance sheets and financial reports – they are active investors.
An example of an active approach would be “value” investors looking to buy stocks whose stock price is low relative to their book value. Others may look to invest for the long term in “growing” stocks that may lose money right now, but are growing rapidly and hold promise for the future.
Passive (indexed) investing is becoming more and more popular, overtaking active investment strategies as the dominant logic of the stock market. The growth of low-cost mutual funds, exchange-traded funds and robo-advisers are partly responsible for this increase in popularity.
