Sophisticated Investor

What is a 'Sophisticated Investor'

A sophisticated investor is a type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.

For certain purposes, net worth and income restrictions must be met before a person can be classified a sophisticated investor. The distinction makes an investor eligible to buy into certain investment opportunities, such as pre-IPO securities, that are considered "non-disclosure" or "non-prospectus" issues. Typically, a sophisticated investor must have either a net worth of $2.5 million or have earned more than $250,000 in the past two years to qualify.

BREAKING DOWN 'Sophisticated Investor'

Sophisticated investors may have to prove their net worth prior to being eligible to purchase certain security types. Investors will often have their personal accountants send this proof to the brokerage firm. Sophisticated investors are the dream clients of most financial services firms, as they generate much higher fees than retail investors.

Certain assumptions are made about sophisticated investors: that they can hold their investments indefinitely (the funds do not need to be liquidated for cash needs), and they can assume a total loss of investment principal without causing severe damage to their overall net worth.

RELATED TERMS
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a ...
  2. Accredited Investor

    A term used by the Securities and Exchange Commission (SEC) under ...
  3. Retail Investor

    Individual investors who buy and sell securities for their personal ...
  4. High Net Worth Individual - HNWI

    A classification used by the financial services industry to denote ...
  5. Deficit Net Worth

    A scenario in which liabilities are higher than assets. Deficit ...
  6. Institutional Investor

    A non-bank person or organization that trades securities in large ...
Related Articles
  1. Managing Wealth

    How To Become A Sophisticated Investor

    No one doubts the value and importance of investor education and sophistication, but many investors are not really all that sophisticated. Goldman Sachs was scrutinized for marketing complex ...
  2. Managing Wealth

    Do You Understand Investment Risk?

    Many investors overestimate their level of financial knowledge.
  3. Investing

    Managing Market Volatility with Alternative Investments

    Managing the effect of market volatility on portfolios has become the primary concern for the sophisticated global investor.
  4. Investing

    What High Net Worth Means

    A high net worth individual is someone with many liquid financial assets.
  5. Markets

    Understanding Private Placement

    Private placement refers to offering and selling shares in a company to a small group of sophisticated buyers.
  6. Managing Wealth

    3 Differences Between Average Joe and Mr. High Net Worth

    Take a look at how income levels and financial circumstances dictate decisions for today's eclectic group of market advisors and investors.
  7. Investing

    Popular Resources for Equity Research and Analysis: Chapter 9: Institutional-Level Data and Library ...

    Moving up the fee ladder, trading, research and data aggregator resources qualify as institutional level for more sophisticated investors and research shops. On the education front, financial ...
  8. Markets

    Do You Have What it Takes to Be an Accredited Investor If the Rules Loosen?

    The definition of accredited investor may expand if the Senate backs the House and approves the Fair Investment Opportunities for Professional Experts Act.
  9. Investing

    The Importance Of Knowing Your Net Worth

    It is vital that you track your net worth no matter what your age.
  10. Investing

    "Experienced Investors" And Damages Claims

    We look at what is meant by the term "experienced investor" and its implication during damages claims.
RELATED FAQS
  1. What are common factors that lower your net worth?

    Net worth is determined by calculating financial assets versus liabilities. As the liabilities increase versus the assets, ... Read Answer >>
  2. How can I use risk return tradeoff to determine my risk tolerance and investment ...

    Learn how an investor can use the risk-return tradeoff to determine what assets to include in a portfolio, and understand ... Read Answer >>
  3. What are some of the limitations of only looking at the rate of return for an investment?

    Learn why only reviewing the rate of return for an investment poses a risk to the investor and what additional factors should ... Read Answer >>
  4. What's the difference between a mutual fund and a hedge fund?

    These two types of investment products have their similarities and differences. Read Answer >>
  5. Can hedge funds trade penny stocks?

    Discover the types of investments hedge funds can engage in, their primary goal, and the restrictions that preclude the average ... Read Answer >>
  6. How do investors lose money when the stock market crashes?

    Over the last hundred years, there have been several large stock market crashes that have plagued the American financial ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center