Types of Investors
As you peruse mainstream financial publications, you will sometimes see mention of institutional investors, accredited investors, and retail investors. This might be a good time to review what those terms mean. If you're here, odds are that you are a retail investor. After all, FS Insight is boutique investment-research firm that focuses on providing retail investors with access to institutional-grade research. Retail investors is a fancy way of saying "regular individuals" who happen to invest in the financial markets. Retail investors are those regarded as being less able to bear the risk of significant investment losses, as well as those who perhaps have a less developed understanding of investments in general. Much of the regulation governing the U.S. financial sector is geared toward protecting such investors, for instance by requiring that they are provided a full and accurate description of potential risks and rewards of a given investment before they make an investment decision. Speaking generally, retail investors are barred from allocating into certain types of investments that are deemed to be either too risky or too complex. Accredited investors are those defined as those that are viewed as better able to take on greater risks, whether due to higher levels of income, assets, or proven investment knowledge. Unlike retail investors, accredited investors can participate in hedge funds, private equity funds, and most types of venture capital funds. They can also participate in some types of private placements and complex derivatives. (We will discuss these in a later FSI Academy piece.) For individuals, an accredited investor is one who has a net worth of at least $1,000,000 – excluding the value of their primary residence, OR one with a gross annual income of at least $200,000 ($300,000 if considering a married couple or spousal equivalent jointly). If using the income qualification, the prospective accredited investor in question must have maintained this level of income for at least two years and have a reasonable expectation of continuing to do so this year. Alternatively, an investor who demonstrates a level of financial sophistication through a professional certification – specifically, a Series 7, Series 65, or Series 82 license, can qualify as an accredited investor. Qualified purchasers (in an investment context) are viewed as even more able to bear significant investment risk. For individuals, a qualified purchaser is one with more than $5 million in investments. Qualified purchasers are allowed to participate in opportunities that are barred to accredited investors, such as 3(c)(7) funds. Finally, we have institutional investors. As the name implies, only institutions fall into this category – no individual or household, no matter how wealthy or experienced or high-earning, can be an institutional investor. Institutional investors can include insurance companies, pension plans, and some types of non-profit organizations. Institutional investors can invest in everything that a qualified investor can. However, if an institutional investor owns and invests at least $100 million in securities from unaffiliated issuers, it can also act as a Qualified Institutional Buyer, thus participating in the Rule 144A market — a private market for the trading of restricted securities that have not been registered with the SEC.
Series of 3~5 minutesLast updated9 months ago