When it comes to investing into the stock market, it’s important who you’re playing against. Like a game of poker, it’s not a game where you play the dealer, but you must play the people around you.
Blue Chip Investors:
These are investors with some finance and investing experience. Usually, they are passive investors and only invest in large cap and safe companies such as Facebook, Amazon, Netflix, and Google.
These are investors who are willing to take a bit more risk. They are often not from the financial industry but have an interest or continues to learn about the market. They typically follow simple technical trading strategies such as using chart patterns, Bollinger bands, relative strength index (RSI) and more to execute their trades.
These are analysts from investment banks or from the trading floor or individuals who have built complex algorithmic systems to execute on their trade strategies. These investors are highly knowledgeable and have years of experience trading
Companies who list their shares can buy their shares back. A company may choose to buy back outstanding shares for several reasons. Repurchasing outstanding shares can help a business reduce its cost of capital, benefit from temporary undervaluation of the stock, consolidate ownership, inflate important financial metrics or free up profits to pay executive bonuses.
People who are managing peoples’ money for them and investing into stocks and other assets for that person’s retirement. Advisors will recommend you which funds to purchase into and help manage your money depending on your individual goals and age.
Similar to financial advisors, robo advisors are digital platforms that trade on your behalf using algorithms and little human supervision. A typical robo advisor walks you through your financial situation, plan and age when considering how much risk they should take on your behalf. Learn more about robo advisors here.
Clients money that is pooled together into this large fund and managed by a mutual fund manager. Mutual funds charge clients a percentage of equity regardless of how the funds perform. The typical fee ranges between 1% – 2% invested.
When you contribute to your pension, it gets contributed to a fund, similar to a mutual fund that helps you grow it for when you need it after you retire. There are two types of pension funds. The first is the Defined Benefit fund. It’s obligated to pay a fixed income to the beneficiary, regardless of how well the fund does. The second type is a Defined Contribution fund. The employee’s benefits depend on how well the fund does.
Hedge funds are the mutual funds for the wealthy. Hedge funds they are generally considered to be more aggressive, risky and exclusive than mutual funds. The very name “hedge fund” derives from the use of trading techniques that hedge fund managers are permitted to perform. In keeping with the aim of these vehicles to make money, regardless of whether the stock market has climbed higher or declined, the managers can “hedge” themselves by going long (if they foresee a market rise) or shorting stocks (if they anticipate a drop).
Investors in hedge funds have to meet certain net worth requirements – generally, a net worth exceeding $1 million (excluding their primary residence) or an annual income that has surpassed $200,000 for the past two years.
Should you invest yourself?
From a study by Morningstar, a leading mutual fund research firm, compared mutual fund returns with the gains individual investors received. The study found that investor returns typically lagged fund returns. The reason: Investors tended to move cash in and out as markets would rise and fall, often buying high and selling low.
The story here is unless you’re willing to put the time in learning the markets and building a system of technical and qualitative analysis when making trades, you’re better off going with an institutional investor such as robo advisors or mutual funds.