The multitude of actors who operate in financial markets interact with each other to exchange financial assets and allow money from individuals and institutions to be channeled into investments. That’s why in financial markets you can find asset issuers (companies or governments), intermediaries (financial institutions), supervisors and regulators, and investors. Different types of investors can be classified based on criteria such as category, objective, investment horizon, risk aversion or their way of acting when operating in the market.
There are various types of investors such as Individual Investors, Partnership/HUF, Companies, Mutual Funds, Societies and Trusts. Financial Institutions and Foreign Institutional Investors (FII’s).
Let’s discuss more about various types of investors…
Individual Investors: In India, Individuals form a major part of the securities market in terms of numbers. The Individual Investors in India are further divided into two categories in case of Initial Public Offering (IPO) :
Retail Investors – These are known as small investors , people like you and me . One who can apply for shares of an amount less than Rs. 2 lakh .
High Networth Individuals (HNI) –These are also known as small investors but they apply for shares of an amount of Rs. 2 lakh or more.. These are Individual .
Partnership/HUF: An association of members or group of peoples those who form a partnership firm or a Joint Hindu Family who have their HUF business and wants to invest their surplus fund into securities market to earn returns on it, falls under this category of Investors.
Companies: Also termed as corporate investors, companies can also operate as individual investors for which the board should be authorized by the Memorandum of Articles.
Societies and Trusts: These are also an associations of members. But they have to be empowered by their by-laws to invest in the security markets. Here the income earned by such investment should be invested for the objectives for which the society is formed.
Mutual Funds: It is a form of collective investment by investors. A mutual fund collects money from many investors and invests such pooled fund in stock market. Income is received in the form of capital gains, interests or dividends on securities.
Financial Institutions: They are the major investors in terms of volumes and values in the securities market both in the primary and secondary market. These includes banks, insurance companies, pension funds and venture capital companies.
Foreign Institutional Investors (FII’s): This is an entity formed or incorporated outside India with the purpose to invest in India. These entities are required to be registered with SEBI as FIIs
What advantages do institutional investors offer individual ones?
Institutional investments offer numerous advantages over individual investments. First, by managing large sums of money, institutional investors can create more diversified portfolios and therefore spread the capital invested into assets with different characteristics, which reduces the investment´s risk. In addition, when carrying out larger operations than those carried out by an individual investor, the commissions are lower. These institutions also have superior knowledge of the market due to the highly qualified managers they have in their ranks. Due to this, they also offer operational advantages such as the reinvestment of capital gains already generated (known as compounding) or reductions in procedures for collecting interest and dividends on portfolio assets.