Equity Investment

What is Equity Investment?

Equity investment is the amount invested by investors in the shares of companies that are publicly traded on a stock exchange. The shareholders profit from their holdings in the form of dividends or a growth in the value of the stock.

Understanding Equity Investment

Equity investments play a very important role in providing the necessary capital funding for a business, and they very well represent the ownership interest in a particular venture. This source of funding may come from the public through the issue of sharesIssue Of SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more or even from private equity and venture capital players. They do come a long way in having to provide the necessary growth capitalGrowth CapitalGrowth Capital, also called Expansion capital, is the amount of money offered to the fast-growing businesses requiring finances to expand their operations or new market ventures. All in all, it helps facilitate target firms for accelerating their growth rate. read more to help a business undertake the necessary funding for its expansionary activities.

However, there appears to a significant dilution of stake when a company goes public or offers to unload a stake to a venture capital firm. In such a case, the owner tends to lose control and may have a lesser say as to how exactly a business has to be run and may lose out in this regard. The burden of disclosures increases when a company goes public with the requirements to be fulfilled.

Nevertheless, equity investments tend to be solid bedrock providing the necessary cushion and capital for any business to undertake its expansionary activities. They encourage and also facilitate cross border and also institutional investing through the purchase of the necessary stake, and all of this does go a long way in developing the integrity and soundness of the financial markets.

Equity Investment

Types of Equity Investments

Given below are types of equity investment –

Examples of Equity Investment

Example #1

Given below are some of the examples of equity investment

  • Owner’s investment in his business
  • Investment in shares of a public company
  • Acquisition of stake in another company through merger
  • Venture capital investment in startup
  • Private equity investment in mature companies

Example #2

Mr. Kevin starts his business targeting a capital of $10000. He decided to borrow 40% of the total capital as debt. Find out his equity stake.

  • Total Capital=10000
  • Debt=10000*0.4=4000

Calculation of Equity Stake

Equity Investment Example 2
  • Remaining Equity Stake = 10000 – 4000
  • =6000

Advantages

The following points illustrate how equity investments tend to be beneficial

  • Economic Growth – When an owner invests money in any start-up or business to provide goods and services, there tends to be economic growth in the country. New jobs will be created, better goods and services will be provided, and all of this directly boosts the GDP of the country.
  • Builds Transparency – When a company decides to raise money from the public, it does so by listing itself on any prominent exchange in the country. When this is done, the listing requires certain disclosures on the part of the company. Hence this tends to bring about transparency about the business, and this, in turn, builds confidence in the investing public and thus promotes the integrity of financial markets.
  • Provides Capital for Growth – When a venture capital firm provides the necessary funding for any company that has funding requirements, such acts on the part of the PE/VC firm tends to build the necessary growth capital for it to expand its reach and foothold, which would not have been possible if the necessary influx of capital funding was not provided.
  • Reduces Monopolistic Power  When there is equity funding to start a similar business, there will be a reduction in monopoly power in the hands of a few players. This will ensure a better choice of goods and services for the customers and services. Thus a single firm will not abuse its monopolistic power and rather tend to bring about more efficiency and better products and services owing to competition in the market.
  • Facilitates International Investment – When a company tends to be listed, it provides all the necessary information on the exchanges, and there is sufficient disclosure. The foreign companies can now decide regarding the amount it wants to invest, the stake it wants to take in any other company, etc. as it can now have all the desired information available in the marketplace publicly and will not be much of a problem.
  • Promotes Institutional Holding – When a company lists itself on a stock exchange, it will now increase its visibility to further institutional investors like mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more and hedge funds, which can now take stakes in the company through buying equity shares in those companies. In this manner, institutional holdings, too, will be promoted.

Disadvantages

Given below are a few pointers as to how equity investments may have certain disadvantages

This has been a guide to Equity Investment and its meaning. Here we discuss types of equity investment along with its examples, advantages, and disadvantages. You can learn more about finance from the following articles –

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