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investor
Investor is an individual or entity that allocates capital with the expectation of earning a return. The defining feature of an investor is the assumption of risk, as investing involves the possibility of losing some or all of the capital invested. Warren Buffett described investing as “laying out money now to get more money back in the future.”
Investors allocate capital in a variety of instruments, including equity (company shares), debt securities (corporate or government bonds), real estate, and derivatives (options, futures, and forwards). Direct investment in a business through debt financing or equity purchase occurs in the primary market, while the purchase of shares on a public exchange, such as NASDAQ, occurs in the secondary market. Shareholders are investors who own stock, and creditors are investors who lend capital. These distinctions matter because they confer different legal rights, especially in bankruptcy.
Financial regulation distinguishes between retail investors and institutional investors. Retail investors are individuals or households holding relatively small securities stakes. Institutional investors are professional entities such as banks, insurance companies, pension funds, and mutual funds that hold large portfolios across asset classes. Because retail investors are viewed as more vulnerable, securities laws provide them greater consumer protections. In contrast, institutional investors are treated as sophisticated actors who can bear more risk. The Securities Exchange Act of 1934 reflected this distinction by emphasizing disclosure requirements to protect individuals. In SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963), the Supreme Court affirmed that the securities laws were designed to replace the principle of caveat emptor with full disclosure and higher ethical standards.
The Securities and Exchange Commission (SEC) recognizes a subset of investors called “accredited investors,” defined in Rule 501 of Regulation D. For example, a natural person qualifies as accredited if their net worth exceeds $1,000,000 (excluding primary residence) or if their income exceeds $200,000 individually or $300,000 jointly with a spouse for the past two years with the expectation of the same income in the current year. Accredited investors may participate in private offerings exempt from certain disclosure requirements, on the rationale that their wealth and sophistication allow them to “fend for themselves,” as recognized in SEC v. Ralston Purina Co., 346 U.S. 119 (1953).
Investors can be passive or active. Passive investors hold securities long-term without attempting to influence corporate governance. Active investors seek to influence management or strategy, sometimes through litigation, proxy contests, or public campaigns.
Investing is distinct from gambling. While both involve risk, investing is based on the analysis of measurable risks and expected returns, whereas gambling is based on random outcomes. For example, U.S. Treasury bills are considered low-risk investments with modest returns, while distressed debt carries higher yields but also the possibility of total loss.
Research in behavioral economics has challenged the assumption that investors act as fully rational market participants. Evidence shows that investors are influenced by cognitive biases, emotions, and heuristics, leading to systematic but predictable errors. Examples include speculative bubbles such as the dot-com boom and the U.S. housing bubble preceding the 2008 financial crisis. Historical cases, such as Isaac Newton’s losses in the South Sea Bubble, illustrate that even sophisticated investors are subject to irrational behavior.
[Last reviewed in September of 2025 by the Wex Definitions Team]
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