What type of investor are you? Profiles and strategies

The first major differentiation between investors must be made based on the situation of the investment subject, which can also be a natural person or legal entity. This is essential because depending on your situation, the regulations will be different, and you can invest to a greater or lesser degree in vehicles and financial assets.

• Institutional investor

This profile refers to institutions and, moreover, it tends to be associated with having large assets with potential investors. Generally, institutional investors are those such as fund managers, investment funds, sovereign wealth funds, banks, collective investment institutions, etc.

The role of these investors is to serve as a bridge or act as an intermediary. This means that a retail investor can invest in the markets through an institutional investor. The great advantage for retailers is that there are products that can only be accessed through institutional investors, such as investment in private equity.

• Professional investor

The professional investor is further down the ladder. According to the definition given by the European Directive itself, a professional is someone who “has the necessary experience and knowledge to make their own investment decisions and to assess the risks they assume.”

In order to receive this professional title, an authorization or regulation is also required. Therefore, they also include institutional investors, other large companies, public bodies and some people who can be considered “professionals” if they meet certain requirements.

These requirements for requesting the “professional” rating include having assets of more than 500,000 euros, having carried out transactions with a high volume and having held positions in the financial sector.

• Retail investor

Being a retail investor does not have so much to do with the assets that are held, but rather with the knowledge and situation. A retail investor is anyone who has more than 100 million euros or just 10,000 euros.

Similarly, a small or medium-sized company that wants to invest would also be considered a retail investor. In other words, it can be both an individual and a legal entity. What they all have in common is the lack of experience and knowledge in the financial sector.

Why is the distinction between institutional, professional and retail important?

This separation in three levels of types of investors in the financial markets is important due to the protection given at the level of European regulation. It is understood that both professionals and institutions, having experience in the sector, can access more risky products. However, retailers, as they do not have that experience, are protected to a greater extent and have no access to all products, and before investing, they are usually given a suitability test to assess their knowledge and determine for what they are suitable.

This classification is focused on knowing the knowledge of the retail investor, since it is given a name according to its financial level and its objectives and aversion to risk. In fact, when the MiFID II test is completed, the investor is classified by their risk and the financial adviser must offer products according to their situation.

In this regard, BBVA in Switzerland has five investment profiles: very conservative, conservative, moderate, risky and very risky. Depending on the investor's situation, their portfolio will be more focused on products with more or less risk. If investors are conservative, they must invest in investment vehicles or products with a low or medium-low risk profile, such as fixed-income funds. Moderate investors may combine fixed-income with equities and perhaps other assets, provided that the risk level is not exceeded. While the most risky investors will have a majority position in stocks.

• Long term

Investors who want to prepare for retirement are included here, as well as those who want to make a capital transition. This is important because in the long term, it is essential to take into account aspects such as inflation or systemic risks.

This type of investment allows you to opt for products such as private equity funds, which have a duration of ten years or more. But they also allow generating the famous compound interest within variable income. This type of deadline applies not only to retailers, but also to institutions and professionals. Sovereign funds, pension plans, family office and others have a long-term investment approach.

• By objectives

This type of investment seeks a specific purpose. This could be a person who wants to invest to buy a house within five years, or a company looking to acquire another house or increase its assets over a given period. Above all, the search for opportunities is more important in the current market situation.

The time frame is shorter, and it does not make as much sense to look for private equity or alternative funds, but rather it would be necessary to focus on both variable income and fixed income. In other words, in this case, we need to be much more selective and reduce the investment universe to adapt it to the time horizon.

• Short term

Finally, the last category includes both very risky investors and very conservative investors, although this may seem contradictory. This approach is dominated by both funds and monetary products, such as Treasury Bills and investment based on technical analysis.

The key is not so much risk, but the time horizon. The person who invests in monetary assets does so because he or she knows that it is a liquid and short-term product in order to receive a return on his or her money in a more secure manner. Meanwhile, the investor who engages in trading operates in very short terms.

In short, the types of investors in financial markets can be classified in many ways. Not only are assets, knowledge and investment objectives important, but also factors such as risk aversion and the degree of protection that you want to have come into play.