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 or dividends. 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 fund for acquiring ownership in a private company or as venture capital in infant companies. The investor gains his income only when the company decides to distribute the proceeds after liquidating the assets or when they sell their shareholdings to other investors. In the latter scenario, the firm has to meet its obligations as priority.
So, these equity investments are directly proportional to the profits/losses made by the company. The investor does not share the responsibility of the company directly unless it is common stock with voting privileges. Investors operate through a fund manager to purchase a diverse portfolio of stocks or bonds called mutual funds. These are professionally managed equity investment 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 main disadvantages of equity investments are some loss in control of management to the firm and a considerable risk factor for the investor.
Equity Investment Instruments
There are various types of equity investment instruments that are tailored to meet the needs of the company. Understanding them will maximize wealth and minimize risks.
Common Stock is where the investor holds some shares of the company and earns money as dividends, which is not a guarantee. 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 a more stable equity investment with no power in decision-making. Dividends are regular and independent of the market. The dividends may be predetermined or floating. There are different types of preferred stock to choose from.
Warrants are unique such that common stock is available at a specific price during a stipulated time-period. If is not purchased, it will become worthless and will return higher dividends when bought.
Convertible Debt is a bond without collateral that is exchanged for common stock. These debentures are priced at rates lower than stock-prices.
Equity line of credit is similar to bank line of credit. It is a commitment by the investor to purchase 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 may be transferred to another person 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 utilize private equity investment funds for any of the following strategy.
Investment firms in London guide investors to increase their earnings depending on the chosen strategy of the company.
Leveraged buy-outs occur when the company wants to acquire 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. These companies are mature and reliable for making an equity investment.
Profit from a change in valuation is a short-term investment compelling the investors to trade.
Mezzanine Capital or debt investment where money is loaned 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 is quoted publicly offshore. The investor is exempted from taxation and therefore worth considering.
Equity Investment Styles
Investment banking firms examine the stocks in much greater detail and therefore guide the investor accordingly.
Blend is an equity investment fund that may display either growth or value characteristics and in some cases both, depending entirely on the prevailing market condition.
Growth at a reasonable price is a portfolio where the company will demonstrate 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 are under valued but have 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 detailed and accurate.
Return on investment and the time duration.
Details on the limited control after investing.
Associations like the British Private Equity and Venture Capital Association can help network investors and the firms. There are well-established companies in London that guide both investors and entrepreneurs regarding equity investments. They are quick and efficient in streamlining the entire process for a symbiotic benefit.
Conclusion
Equity investments meet the fund requirements of an organization. Here, the investor realizes equity instead of the traditional interest on the capital amount. Businesses must be convinced that equity investment is the right finance option before they finally decide upon. This is because the process is cumbersome and the management may lose some control of their power to the investor. On the other hand, 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.
So if you want to invest in some of the very attractive business ideas, log onto Venture Giant and go through the extensive collection early-stage and seed start up proposals for angel investors that are targeted towards expansion/growth capital, seed or early stage investment and R&D (Research & Development) funding.
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