The primary objective of investing depends on the individual investor's financial goals. Although the ultimate goal of all investments is to earn money, the method for how to invest money can vary dramatically depending on whether you're a dividend investor or a real estate investor and whether you prefer the stock market or income investing. The amount of risk you can bear, along with your investment time horizon, also plays a role.
Understanding the goals of different types of investors can help you determine your strategy for how to start investing.
Preservation of Capital
Low-risk income investors seek preservation of capital above all, even if it means earning a small return. This type of investor is drawn to lower-paying, conservative investments like bank certificates of deposit, money market funds and U.S. Treasury bills. Bank CDs and money market funds carry FDIC insurance and U.S. Treasury bills are backed by the full faith and credit of the U.S. government.
Revenues and Dividends
Growth and income investors try to have the best of both worlds — the growth potential of stocks and the income generated by bonds. A growth and income investor might choose to construct a portfolio made of these individual components, such as stocks, bonds or mutual funds, so that the overall blend enables the investor to create a balanced portfolio of both growth and income. Blue chip stocks are another option, as they have the potential to rise with the overall stock market but also typically pay regular, sustainable dividends. Dividend growth investors focus on dividend-paying stocks with a history of raising their dividends, thereby achieving a growing revenue stream.
Growth investors don't seek interest or dividend payments; rather, they're interested strictly in capital gains. Growth investors typically favor stocks, hoping to buy low and sell high. Although growth investors have a higher risk profile than income investors, they still seek to keep risk at a manageable level. Diversification among different stocks — or across asset classes — is a good way for a growth investor to get exposure to the market without tying his fortunes to a single investment.
Maximum Income at Minimal Loss
The primary objective of the high-risk income investor is to generate the highest possible income without losing any principal. Although many income investments are considered lower-risk, there are a number of high-risk income options, including high-yield bonds. High-yield bonds carry lower credit ratings and are more vulnerable to default. Emerging market bonds, which are issued by companies in less developed nations, also carry the risk-reward profile that would be attractive to a high-risk income investor.
Speculative traders typically have short investment time frames, seeking out maximum gain with little regard for risk. Day traders, who buy and sell stocks multiple times per day, are speculative investors — they're willing to take a significant risk for the chance at an outsized profit. Other types of speculative traders can amp up their market exposure and risk level by taking concentrated positions in a limited number of securities, buying only high-risk, high-reward stocks, or using leverage to amplify their gains.
Amplified Gains and Reduced Risk
Options and futures might seem like exotic financial instruments, but in reality they are simply contracts to buy or sell investments at a future date. Whereas options give an investor the choice to buy or sell an investment at a future date, a futures contract obligates the buyer to do the same. Sometimes, options and futures traders open speculative positions, relying on the leverage afforded by these contracts to amplify gains. They are also used by traders for hedging purposes, which actually reduces their risk profile.
Two main types of business investors exist. Speculative investors, such as venture capitalists or angel investors, hope to get in on the ground floor of a growing business and profit when they either go public on the stock exchange or sell the business. Entrepreneurs invest in their own businesses and hope to build them up to profitability on their own. Whereas a speculative investor is typically looking for a profitable exit, entrepreneurs usually intend for their businesses to generate an ongoing stream of revenue and profits.
Shelter, Appreciation and Profit
Although it doesn't take much money to buy stocks, bonds or options, buying a home requires a considerable capital outlay. For most homeowners, the primary investment objective is usually to have shelter for themselves and their families. However, most homeowners also hope for price appreciation over time.
Other financial reasons for owning a home exist, including the fact that it's often cheaper than renting and you get a significant tax break. More speculative real estate investors might engage in "flipping," or buying a property in hopes or generating a profit on a quick sale, often after renovation.
Learn: How to Flip a House
In contrast to a homeowner or a house flipper, a real estate developer intends to purchase a parcel of land and improve it with housing or retail space. Typically, the objective of a developer is to resell the developed land or lease it out to generate ongoing revenue. Because there are no guarantees that the project will ever sell, real estate developers take on high risk for high reward.
Keep Reading: Investing for Beginners — How to Invest in Real Estate