Introduction
I thought of writing about this topic since, I started investing without even understanding what type of investor category I belong to. If you are starting to invest in stock markets, this should give a fair idea on what type of investor you are and which one to choose. I have ignored institutions, corporates, company promoters since the focus is on individuals.
Types of Stock Market Investors
Previous image of “Then I met the third kind…” is taken from the hindi film “Rang De Basanti”. Derived (or) inspired from that, I have categorised investors in to 6 categories out of which the Last one is silent 😊.
Let us understand the different types of investors in India. Most probably this will fit for the global model too.
Fundamental Investors
Typically these type of investors refers to fundamental accounting principles, understanding the business, reads the annual reports of the company that they are planning to invest, checks their past performance through various tools like screener.in, money control, valueresearchonline, etc., and uses excel sheet 😊 for checking the performance with various ratios : Price To Earning (PE), Debt to Equity, ROCE, EBITDA etc.,
They stay invested as long as the business performs well irrespective of any macro situations. People who are interested in following this style would need to have the basic accounting principles (School accountancy, economic books will be a good starting point).
Technical Investors
I have taken this from Zerodha Varsity:
“Technical Analysis is a research technique to identify trading opportunities in the market based on the actions of market participants”.
The key highlight is the “trading opportunities”..
I won’t call them completely as “traders” as against investors, since they also understand the timeframe for their strategy to work. Hence, included them as part of technical investors. I have known people who invest in small cap, mid cap, large cap (Market capitalisation parameter) companies and stay invested for a very long term. I have known people taking a trade for less than 3 minutes too. Irrespective of their timeframe their strategies is what everyone should be interested in.
Tools like tradingview.com would help you understand how does price move based on the market sentiments.
Caution:
1. Start reading about technical concepts before even investing a rupee.
2. Use Paper trade mechanism (or) follow tradingview.com and apply your learnings. Assuming you purchased based on your learnings see how the price moved in this tool. This would avoid taking losses if your understanding is in-correct.
Techno Funda Investors
This category of investors are people who take a decision “Buy” (or) “Sell” (or) “Hold” based on the combination of Fundamental and Technical parameters. For example: They filter the companies based on the various fundamental parameters (or) ratios. Then they analyse the charts for those companies and figure out an entry and exit point. When the strategy works out.
Tools like: investing.com, screener.in (limited technical parameters), ticker tape.in are excellent for any beginners to start with.
Social Investors
YES. I call them as “Social Investors”. This is not new but since the growth of social media has created a lot of awareness among the investor group. Earlier, the conversations between friends were limited to a closed friends circle. Now, everything is online and the discussions became very transparent. Stock market has not been left out. There are stock guru’s, tips providers, strategies that worked, lessons learnt, avoiding common mistakes etc., Since everything is in huge numbers, it’s quite difficult to take one strategy and make it work. It will be a borrowed strategy until you learn the techniques correctly.
WhatsApp groups, Telegram channels, Tweets, Facebook posts all contribute in one’s knowledge to become an investor. However, these strategies will still be a derived one from either of the first two. (Fundamental, Technical).
Common Sense Investors
I like them and had named them since they don’t fall in all the above categories. Instead they rely on their gut feeling or behaviour based investment ideas. They don’t take any advice (In one way it is good since they are independent thinkers)
- Do I need this money for next 5 years? If not, can I invest?
- I am using this product for more than 5 years. Why not invest in the company?
- The future will decide the price. Let me purchase this now and forget it. (Risky, but still followed by our previous generation).
- I am happy to get the dividends as additional income. My capital is still invested since I don’t need that money for next ‘N’ years. (N > 5 / 7 / 10) years.
These are few typical questions that they ask themselves and figure out an answer by themselves and start their investment journey. Newspapers and magazines they come across may also contribute to the strength of their strategy.
Is it Right time Investors
There are other types of investors too like Contrarian, Value investor but, it’s all a subset of these. I do respect each and every investor types or a mix of these. However, the last category I have called out are the ones who speculate things, never take any decisions, but still interested in the stock market and criticises the efforts of investors. They predict things wrongly and question the underlying principles and call’s it as gambling. They are afraid to book a loss too. I am not harsh here though, but it is how the people are being looked in to. The dotted line in the above diagram is only for such investors.
They call themselves as a fit strategy for all. It is good to change views only when you are retrospecting on your failures, but not good if it is being changed often on every failures. These type of people swinging between all 5 categories and call investing in stock market will not fit their style.
Conclusion
As an investor it is good to know your strengths and play accordingly. Check which type of investor category you belong to and apply your learnt principles in your investment journey.