What Are the Different Investor Types?
Introduction | Types of Investors
Types of Investors: Know the Secrets of the Rich! (Rich Dad Poor Dad). According to Rich Dad, being any type of investor gives you different investment opportunities such as initial public offerings of stock (IPOs), private placements, and other corporate securities. Most of the richest people in the world are investors – these people are the 10 percent of the population who control 90 percent of the money.
The rationale of this blog post is to elaborate on the definitions of various types of investors, which investor category you fall under, and which category you might want to aim to be in the long-term. Now let us dive deeper into the different types of investors.
Read these separate blog posts about Rich Dad Poor Dad summary and the concept of cashflow quadrant.
Overview on the Different Types of Investors
- Accredited Investor: Earns a lot of money and/or has a high net worth
- Qualified Investor: Knows fundamental and technical investing
- Sophisticated Investor: Understands investing in the law
- Inside Investor: Creates the investment
- Ultimate Investor: Becomes the selling shareholder
- Accredited Investor definition: A long-term investor who has chosen to invest for security and comfort may very well qualify as an accredited investor. In America, less than 3% of the population meet the qualifications of an accredited investor.
- These are the accredited investor requirements according to SEC:
- $200,000 or more annual income for an individual
- $300,000 or more for a couple, or
- $1 million net worth
- If you are a qualified accredited investor, you will have access to investments that the majority do not. However, financial education is still key in order to be successful in choosing your investments. If you do not have time to invest in your financial education, you should ask competent financial advisors to assist you with your investment decisions. In this case, they can also handle your money for you.
- This type of investor understands how to analyze publicly traded stock. This investor would be considered an “outside” investor as opposed to an “inside” investor.
- A qualified investor has money and knowledge on fundamental and technical investing.
- Fundamental Investing: Looking at a company’s value and growth through financial statements. The future earnings potential of the company should be highly considered.
- Technical Investing: This means investing your money based on market trends/patterns – in short, emotions of the market. Supply and demand is key in technical investing.
- Generally, stock traders and analysts fall under this category.
- Being a sophisticated investor means you understand the world of investing – you utilize the tax, corporate, and securities law to maximize your earnings and to protect the underlying capital.
- In short, this investor typically has all of Rich Dad’s three E’s – Education, Experience, and Excess Cash.
- The ultimate goal of this investor is to build a successful business. They typically fall under the B quadrant of the Cashflow quadrant mentioned below, and they know how to create and build assets.
- Here’s a quote from Rich Dad Poor Dad: “The rich invent money. After you learn to make your first million, the next ten will be easy.” –Rich Dad
- The goal of the ultimate investor is to become the selling shareholder. This investor owns a successful business in which he sells ownership interest to the public through IPOs.
Now that you understand the different types of investors and the strategic ways they make their fortunes, take a minute to ask yourself these questions:
- Do you fall under any of these investor categories?
- If yes, what type of investor are you?
- Which investor category do you want to be in the long run?
By reading this blog post, you basically now know the operating philosophies of some the wealthiest people in the world, and why they are part of the 10 percent of the population who control 90 percent of the money!
Cashflow Quadrant Summary: Rich Dad Poor Dad
“The only reason I built businesses was so I could invest in the investments of the rich. The only reason you build a business is so that your business can buy your assets. Without my businesses, I could not afford to invest in the investments of the rich.” –Rich Dad
The cashflow quadrant concept is such an eye-opener. I have applied the lessons that I learned from this concept in my life. While this blog post focuses on the cashflow quadrant topic from Rich Dad Poor Dad, the complete overview of the general concepts from Rich Dad Poor Dad summary are included in another blog post!
The Components of the Cashflow Quadrant
- E Quadrant (Employees): These are the people who work from 9-5 for businesses or corporations and follow a certain workflow or system. People in this quadrant come from all walks of life—from janitors to presidents of companies.
- S Quadrant (Self-Employed): These are professionals with formal education and specialization such as doctors, attorneys, engineers, accountants, etc.
- B Quadrant (Business Owners): Being a business owner means you own a system and people work for you. Having a business will give you the best chance for great wealth and financial success.
- I Quadrant (Investors): These are people who invest their money in stocks, real estate, small businesses, corporations, etc. Being an investor means money works for you.
Different Quadrants, Different Paths
Poor dad’s advice: “Go to school, get good grades, and then find a safe secure job with benefits.” Poor dad values job security and he holds on to the retirement plan offered by the government.
Rich dad’s advice: “Learn to build businesses and invest through your businesses.” Rich dad believes in the power of businesses for it will buy your assets with tax benefits.
Emotional Differences of the Quadrants
People in different quadrants have different emotions. These differences are crucial for they are triggers/reasons as to why these people fall under their respective quadrants. For example, someone who values job security belongs in the E quadrant, and so on.
Difference in Investment Capabilities
There is a big difference between an employee buying an investment and an affluent business owner buying an investment. Not all investments are available for employees. Meanwhile, there are investments that are available only for affluent business owners—investments that have the least risk with the highest returns. That’s why rich dad says that there’s such thing as ‘investments for the rich’—these people are also known as accredited investors.
Hence, the ultimate goal is to move from the left side of the quadrant to the right.
Take a few minutes and ask yourself these questions:
- Which quadrant do you currently belong to?
- Which quadrant do you want to belong to in the long-term?
- What goals will you set to get to that quadrant?
Did you like this concept from Rich Dad Poor Dad series? Please also take a quick peek at the summary of lessons from Rich Dad Poor Dad!
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