Types of Investors

Over the weekend, during a family visit, I had a conversation with one of my nephews – a thirty something husband, father and CFO of a small company. He is a wanna be entrepreneur and has had several ideas but has so far not acted on any of them.

His latest idea would allow him to make money while satisfying a lifestyle change desire. He and his family currently live in a home in a suburban subdivision. He and his wife recently got excited about living a more rural lifestyle (raising chickens and goats), but still with all the modern amenities and conveniences.

His idea was to buy some land, a bit outside his own area and develop it into an estate type community – homes with acreage. That way he could have a project and satisfy their new found lifestyle desires.

This man works for a family firm that deals in real estate and has some connections to people who have done development, but has no experience himself.

After the visit, I got to thinking about how it would be fun to be involved in a project like that. That led me to thinking about investing with him if he proceeds, but since he is family, I decided that would not be a good idea.

Long story short, I then decided to see how I could invest in things other than stocks, bonds and mutual funds. Here are my findings on what kinds of investors there are.

Stock market investors.

It is easy to become an individual investor in the stock market. Many of you probably are – especially if you have a retirement plan. First, you need an emergency fund, to handle things like being laid off, the washing machine failing or the dog needing surgery. Once you reach that financial plateau, all you have to do is open a broker account somewhere and send in a check. Of course, you would investigate the fund or company in which you plan to invest prior to shelling out!

Stock market investors can be do-it-yourself types, doing all the research themselves, making their own trades online and etc; or they can range from using a bit of help from time to time or turning over their investment decisions to a financial advisor for a cut of their portfolio.

Lenders who invest.

Although lenders aren’t specifically buying a piece of an entity, lending money is a way to make money from money.

Bank loans are the age old solution to a company’s need for funding, but there are new options on the lending front thanks to technology.

Peer to peer lending websites allow borrowers and lenders to meet up directly – without any one (except the platform) in the middle. At least they used to. Forbes published a guest post in 2014 claiming that most of the lending on the P2P sites was then being done by institutions and the boards of most of the platforms were loaded with banking executives.

But, individuals can still use the platforms to lend money. Choose the level of risk you want to take, the amount you want to invest and build a ‘portfolio’ of loans. Sites claim that income can range from around 7% to as high as 25% (depending on the level of risk you undertake).

Real estate investors.

Real estate is a time honored way for individuals to invest. Since the property serves as its own collateral, entry for first time investors can be relatively easy. Of course, there is a down payment that typically needs to happen before a loan is issued by the bank or mortgage company and loans to investors rather than homeowners can be a bit more difficult.

Real estate investing is divided into 2 main categories – investing in residential property or commercial property.

Family and friend investors.

This is what I would have become had I decided to go ahead and fund my nephews development plans. You don’t have to have any certain income or networth to help out a family member, but there is always the risk of losing your money and endangering family relationships.

At one point, I was thinking of setting up a family ‘bank’ to fund future family member endeavors. The bank would actually be a trust, funded by me, with certain rules on how the money should be invested and dispersed to various endeavors.

Start up company investors.

Angel investors and venture capitalists are two types of investors who might invest in a start up. Angel investors are typically wealthy individuals who have an entrepreneurial background. Venture capitalists invest other peoples money in new businesses. Both types are accredited investors.  Until recently only accredited investors in the US could invest in start up companies. To be an accredited investor as an individual, you must meet certain income and/or net worth levels.

The TV show Shark Tank has raised awareness about what goes on in the world of investing in start up businesses. The ‘Shark’s are actually Angel Investors – putting their own money into the startups they choose.

At first, I thought perhaps I might like to be an Angel investor. I could get a stake in the company or earn money from a loan. Some Angels serve as mentors and advisors, but since I’ve never started up a company, I would probably just be providing funds, not expertise. I am eligible to become accredited, but in doing research for this post, I learned that most angels lose their money and that it takes a lot of time and effort to pick good start ups.

Now, with changes to the Securities and Exchange commission rules, non-accredited individuals can invest like angels – via online crowd-funding sites. According to Wired post You Too Can Now Invest In Start-ups. What Could Go Wrong:

According to Wired:

“While individual angel investors and venture capitalists have been able to reap millions of dollars from smart investments, they don’t only invest in one or two startups—they invest in many, knowing most will fail and hoping that one hits it big. They also have experience, industry expertise, research, and money—all things that a regular person might not have when looking at a new equity crowdfunding platform.”

A typical start-up company might first bootstrap itself, then accept any help available from family and friends, then try for Angel investors and next go for the big bucks using a venture capitalist. Venture capitalists are hired to invest other people’s money – studying and picking the best opportunities. They may invest as much a million in promising companies. However, they take a stake in the company and may want to step in and run it.

So, for now, I guess I will remain a stock market and real estate type investor.

Do you know of other kinds or types of investors?

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