Way too often, we look at the term “investing” as a universal description of financial planning. Speaking in a strictly literal sense, it’s true. Investing means putting money into an asset or venture in the hopes that it will grow into more money over time. But when we talk about investing strategies and tendencies, it become more important to recognise just how many different kinds of financial growth efforts fall under the umbrella of the term. So what kind of investor are you? Let’s look at some of the most popular types there are.
1. Long-Term Market Investor
This is probably what most people think of when they think of “investing” in a broad sense. The idea here is to buy up stocks to create a portfolio that you will manage continuously over the course of years or even decades. That doesn’t mean you hold the same stocks that whole time, but the idea is to aim for long, gradual gains and to minimise short-term risks. This article about why diversification in investment matters actually recommends that long-term investors buy into different markets (stocks, bonds, cash, etc.), but even within a pure stock portfolio diversification is important for a long play. You’ll want a hand in different, unrelated stocks and industries so that if one goes south you lose less. There’s a greater chance of a net gain over time.
2. Day Trader
The term “day trader” is sometimes misunderstood, because even a long-term investor might keep an eye on stock movements on a day-to-day basis. But a true day trader as the term is meant to be understood is someone who regularly buys and sells stocks within a single day or a matter of days. It’s a style based on short-term outlooks and an attempt to capitalise on the smaller fluctuations that take place constantly in the markets. To some extent this type of investment relies less on diversification and more on quick action, chart analysis, and an up-to-date understanding of relevant news. If you fancy yourself a day trader, you’re essentially making investing an occupation, or at least a side job.
3. Mutual Fund Investor
“Mutual fund investor” is almost an oxymoronic term, in that if you’re using a mutual fund you aren’t directly doing any market investing. You’re really just investing in the fund itself. Still, for a lot of people this is ideal. This list of benefits from mutual fund investing pretty much clarifies why this is the route many personal investors choose to go, but to summarise; these funds reduce stress and personal accountability, emphasise diversification, and can be managed with ease. You’re essentially just giving money to a professional fund manager who will then pump that money into an existing, diversified portfolio that’s inflated by size thanks to the investments of others. That professional will handle the account until you wish to withdraw your money.
4. Forex Trader
Some investors choose to forego the stock market altogether and instead look to the currency trade, which has its own perks and benefits. This guide to how forex trading differs from stock investment explains that convenience and simplicity account for a lot of the appeal of the forex market. Basically, if you’re a currency trader, you can buy and sell currencies 24/7, as opposed to simply during open market hours. You can also capitalise on the currency market’s incredibly high liquidity (which means you can execute trades efficiently) as well as the fact that only a small handful of currency pairs make up the bulk of the market (meaning there are only so many assets to keep track of). There’s risk, as with stock market investment, but many find the convenience appealing.
5. Bond Investor
Many equate bonds to stocks and while the two are vastly different they’re often handled by the same investors looking to diversify their portfolios. The best way to think of a bond is that it’s essentially a loan agreement. When you buy a bond you’re lending your money to the company at hand, with the promise that it will be returned with interest at a given point. The appeal of bonds is that they’re generally low-risk, provided you buy from a reliable company (or government). However, they’re also lower return than many other forms of investment, which means it’s essentially a low-risk low-reward venture.
6. Alternative Markets Investor
Finally, there are also alternative investors that would rather try to grow their money in ways that don’t involve any sort of traditional financial market. This can mean any number of things such as investing in new businesses, buying up real estate, buying commodities and precious resources, and more. Each option has its own set of potential risks and benefits, though some find the idea of alternative investments in general appealing because they can be approached in a somewhat more leisurely manner.
These pretty much cover the main ways in which people try to grow their finances. And understanding the benefits of each idea and the differences between them can help you to determine just what kind of investor you are, or want to be.