The equity investment or portfolio investment is an investment of cash in shares of companies that are registered as open or closed joint stock companies.
Equity investments allow you to receive a part of the joint-stock company’s profit equal to the proportion of the shares held by the investor, as well as to receive part of the property that remains after the liquidation of the joint-stock company in case of bankruptcy or for other reasons.
Ways to invest in equity
To date, there are several ways to invest in equity, the most common are two: buying shares in an enterprise on an exchange or from a third-party investor. Shares of a company can be sold on the stock exchange only if the company is registered as an open joint stock company (OAO). Buying shares from shareholders is possible only when shareholders wish to sell their securities. Usually, the maximum offers for the purchase of shares are observed in periods of economic restructuring and crises.
The third method involves the acquisition of shares at the time of the additional issue of securities by the joint-stock company. In this case, the shares will be offered for sale at higher prices compared to stock values, but this will allow investors to immediately invest a large amount of capital.
Equity investment objectives
Equity investment can be aimed at receiving passive income or one-time large profits. Having bought out the share, the shareholder has the right to receive dividends on shares annually or more often (part of the profit, which is equal to the share of the purchased shares). Receiving dividends is one of the most common forms of passive income, when an investor receives money without personal participation in paperwork.
Getting a large amount of profit at the same time most often occurs through speculation. Buying shares of companies that recently entered the market; the investor reserves the right to resell the shares. If the security rises in price, the shareholder can sell it, the difference between the sale price and the purchase price will be a profit. Sometimes profits from speculation can be impressive.
In addition, the purpose of investing in equity capital may be the desire to repurchase the whole joint stock company. Considered investments allow for the redemption not immediately, but gradually, without risking all the capital.
Equity is the tool of choice for investment in startups for professional investors. Both business angels and venture capitalists rely on this form of participation in financing, as equity investment have benefits for both investors and startups. Therefore, all stakeholders in the industry – startups, crowd investing platforms, business experts and consumer advocates – agree and plead for investments in real GmbH shares.
The equity financing is a form of corporate financing, in which the money comes from the owners of the company. As the name suggests, the company is financed by its own funds.
Financing gives a company the opportunity to start or make larger purchases within the company without having to resort to lending.This type of financing reduces direct assets but at the same time increases the company’s equity and its corresponding value. Here, a distinction is made between the internal and external capital, which is spent on the investment.
Equity in the company
While in the private sector most of the expenditures are financed by own financial resources at best and only in rare cases larger loans are taken up, in the enterprise also the leverage pays off.
The debt, which comes from loans for larger companies, measures itself quickly with success and can be procured just as quickly, so that in a short time can be invested.
Equity, on the other hand, is generated by the entrepreneurs themselves and, in the event of any loss, is coupled with a risk to the company.
On the other hand, increasing self-financing always results in an increase in equity.Only companies that seek equity security are successful in the long term and accordingly receive debt as needed.
Surpluses are usually funds that can be used for equity financing. The surpluses are those that are retained and transferred to the business assets. Whereas, however, the dissolution of hidden reserves to increase equity is possible.
Advantages and disadvantages of self-financing
The advantages of self-financing are the reduced risk of over-indebtedness, the reduced risk of bankruptcy and the greater independence of the company.
However, one of the disadvantages of equity financing is that equity capital is very expensive in the longer term and cannot be deducted for tax purposes.
The investors, who participate with an equity capital, usually demand risk premiums. In a sense, they protect themselves against a total loss, such as in the insolvency of the company.
When will equity finance be used?
Generally, the rule is that companies should buy long-term value through equity or long-term debt. Accordingly, buildings, company properties or large machinery should be added to equity or financed very cheaply in order to make a profit.
In contrast, part of the current assets is covered by borrowed funds, so it does not have such a severe impact on business assets.