Companies need capital for meeting their current fund requirements or growth plans. An equity investment is an investment by individuals or firms. The investment is usually in the form of stocks whereby profits are in the form of capital gains. The investor considers equity investment as a long-term strategy of maximizing his wealth.
The investor recovers his money only when he sells his shares to others. The equity investment can also be a fund for acquiring ownership in a private company. Also as venture capital in infant companies. The investor gets income when a company decides to assign the profits after dissolving assets. Or when they sell their shareholdings to other investors. In the latter scenario, the firm has to meet its obligations as a priority.
These equity investments are proportional to the profits/losses made by the company. The investor doesn’t share the responsibility of the company unless its privileged stock. Investors operate through a fund manager to sell stocks or bonds called mutual funds.
Advantages and Disadvantages of Equity Investments
There is no interest charged on the committed fund. And if required, knowledge and skill of the investors is an added advantage for the firm. The investor has an opportunity for a higher return on the principal sum rather than investing in a bank. The disadvantage of equity investment
Equity Investment Instruments
There’re many equity investment instruments tailored to meet the needs of any company. Understanding them will maximize wealth and cut risks.
- Common Stock is where the investor holds some shares of the company and earns money as dividends. The investor has minimal power in the decisions based on which class he belongs to. Voting power, dividend payments and rights to assets differ according to the class. It is a risky venture but possible to make higher returns on equity investment in a short duration.
- Buying Preferred Stock is more stable equity investment with no power in decision-making. Dividends are regular and independent of the market. The dividends may be set or floating. There are different types of preferred stock to choose from.
- Warrants are unique whereby common stock is available at a price during a specific time. If is not bought, it will become worthless and will return higher dividends when bought.
- Convertible Debt is a bond without collateral in exchange for common stock. Debentures prices are at rates lower than stock-prices.
- Equity line of credit is like bank line of credit. It is a commitment by the investor to buy common stock over a period of time. The firm has the benefits of flexibility, control, security, speed and market timing. The major advantage to the investor is he pays a discounted rate for the stocks.
- Sales of restricted shares refer to stock of the company that you transfer to another person. That is only after meeting certain criteria.
Private Equity Investments Types
Private equity is any investment made in companies that will not trade it on a stock exchange. Companies use private equity investment funds for any of the following strategy.
We guide investors to increase their earning depending on the chosen plan of the company.
- Leveraged buy-outs occur when the company wants to get another company. The equity investment required will be of high financial amounts.
- Venture Capital is when the equity investment is for a start-up firm or a small business. It is a higher return at a higher risk for the investor.
- Growth Capital is when the company is restructuring or expanding further. Therefore these companies are mature and reliable for making an equity investment.
- Profit from a change in valuation is a short-term investment for the investors to trade.
- Debt investment where money is a loan for a return on interest or an ownership. The returns are as high as 20%-30% for the investor.
- An offshore equity investment is money invested in equities that are offshore. The investor exempts from taxation and thus worth considering.
Equity Investment Styles
Investment banking firms examine the stocks in much greater detail. And so guide the investor.
A blend is an equity investment fund that may display growth or value characteristics. And in some cases both, depending on the prevailing market condition.
Growth at a reasonable price. This is where the company shows higher growth and higher return on the equity investment.
Value is a fund based on low-value but high dividend stocks. The managers invest when the stocks undervalued. But have a high potential for a good return in course of time.
Checklist for Investors before making an equity investment
- Good record of accomplishment and expertise of the management.
- An impressive business plan that is and accurate.
- Return on investment and the time duration.
- Details on the limited control after investing.
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Equity investments meet the fund requirements of an organization. The investor realizes equity instead of the traditional interest on the capital amount. This is because the process is complex and the management may lose some control to the investor. In contrast, the investor gains high returns only if the company performs well. The proposition is risky.
There are mutual benefits if the business plan is sound. The top management is performance-oriented. And the investor can share his investment and expertise for the growth of the company.