Investing in the stock market takes a certain type of personality to achieve success. You need a mixture of good ideas, smart choices, and most importantly discipline. However, many different types of investors can get wealthy investing in stocks. Knowing what type of investor you are – can help you focus on your own personal goals and stick to your strategy. We broke down the 5 different types of stock investors so you can get a better idea of what strategy fits best for you.
Passive investor (Index and ETFs)
Passive investors are the most common type of investors – and they should be. Passive investors look for investments such as balanced index funds and ETFs. They are perhaps the smartest investors because they know they can't beat the market – nor do they try. Passive investors focus more on earning income and then investing the proceeds into a low-cost fund such as the S&P 500 (VOO, IVV, SPY).
Even one of the greatest investors of all time suggest most people should simply put their money into an index fund. "In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts)." Buffet mentions that non-professionals should simply invest in a cross-section of businesses and that "a lost-cost S&P 500 index fund will achieve this goal."
Are you a passive investor?
If you don't want the headache of picking individual stocks (or following the ones you pick), don't care to try to "beat the market" and simply want an investment that is sure to grow in value over a long period of time – passive investing is for you. Check out The 5 Best Index Funds and ETFs for the Rest of Your Life
Divided Investor (Divided and REITs)
Dividend investors seek regular income from their investments. Dividend investing has always been a popular investment style and it seems to have found new life recently amongst millennials in "money twitter". Dividend investors seek individual stocks and funds that pay a regular dividend payment (either quarterly or monthly). Blue chip stocks such as ExxonMobile, IBM, Proctor and Gamble, and General Mills – all pay a healthy dividend that yield between 1-3%. The dividend yield is the percentage of your investment that you get back each year in return for owning the shares.
Real estate investment trusts (REITs) are also known to pay a divided and are popular amongst divided investors. REITs are portfolios of real estate such as housing, apartments, commercial buildings, storage facilities, amongst others that all collect rent from tenants and pay back a large portion of the proceeds to shareholders. REITs are a great way to invest in real estate without having to deal with leaky pipes and unruly tenants.
Are you a dividend investor?
If you are looking to collect a regular income (quarterly or monthly) from your investments and want to avoid the harsh volatility of the stock market, dividend stocks and REITs are a good place to invest your money. Dividend investing is a great style for older and retired investors looking for income from their investments.
Individual Stock Picker
Stock picking is an investment style for those seeking the highest return on their investments and wants to be active in choosing the individual stocks. Instead of owning 500 to 3000 stocks in an index fund – stock pickers are looking for a handful of individual businesses they feel can outperform the market.
Individual stock pickers can get a bad reputation from unexperienced investors who loose money trying to hit it big on the next meme stock or social trend. However, many individual stock pickers choose businesses in which they have a deep understanding of the industry or company. If you were in tech in the early 2000's – you knew how much the internet (and world) replied on companies such as Google and Apple. Having a deep understanding of these companies and how they dominate their industry – would be the perfect situation to be come an investor in the individual stocks of GOOG & AAPL.
Are you an individual stock investor?
Individual stock investors need foresight to find the right companies, patience to hold them over long periods of time, the attention to follow news about the business, and the ability to read an income statement. Individual stock picking is definitely not for everyone – however, if you can spot new trends and have interest in owning your own business – buying shares of individual stocks can make you very wealthy.
Day traders buy individual stocks or stock options and trade them within minutes or hours for profit. Day trading is the opposite of a long-term investment strategy as they close all positions before the end of the day with the goal of having a higher balance than when they started. Day trading is about buying the drops in stock prices and selling high in the short term. Day trading can be very risky as the prices during one day can swing heavily in both directions. Day traders are inevitably going to lose money on trades, however their goal is to make more money than they loose. There are many different strategies, tools, and techniques to being a successful day trader. They key is finding a particular investment (such as SPY), a particular strategy, and paying close attention to charts.
Are you a day trader?
If you know how to read charts, have time during daytime trading hours, a proven strategy, a high tolerance for risk, and can stomach loosing 50% or more of your portfolio – perhaps you are one of the few that can become a day trader.
Active investing is an investment style that involves regular buying, selling, and management of your investments. Active investing often involves a combination of all other investment types – purchasing passive investments, dividend stocks, and individual stocks. But instead of buying and holding forever, active investors are always watching trends and markets and looking for the best places to invest their money. Buying and selling from active investors does not have to be on a daily or weekly basis – however it requires a daily and weekly ritual of managing current investments and seeking new ones.
I consider myself an active investor. I keep a mixture of ETFs and individual stocks in my investment portfolio. I diversify my assets by keeping 50% of my money in an S&P 500 ETF and 50% into individual stocks that I think will be much larger companies in the next 5 to 10 years. I try and keep a short list of 10 companies that I like and follow. As soon as I find a company I like better than another on my current list, I will sell my least favorite stock and replace it with a new one that I have a higher conviction.
Are you an active investor?
If you are the type of investor that likes to subscribe to investment newsletters, talk to others about investing, and watch your portfolio on a daily or weekly basis – you might be an active investor.
Are you ready to start investing in stocks?
No matter what type of investor you are – investing in the stock market has proven to be a fantastic way to build wealth. Check out our guides: How to Get Started Investing in the Stock Market & 10 Things to Know About Investing