Equity investment is defined as the money which is invested in a company by the owner or the holder of the ordinary stock, also known as common stock. However, the owner doesn’t get it back into his business. Instead, investors can only recover it when they can sell off their shareholding to other investors. They can also improve their share when the assets of the company are liquidated. The proceeds of the liquidation are distributed once the obligations of the company have been satisfied.
Why should you invest in Equity?
The forces of taxes and inflation can either make or break financial dreams by impeding wealth accumulation and by reducing the purchasing power of your money. But with equities, one can think about protecting wealth from rising inflation prices as well as earn a higher rate of return.
Advantages of equity investment
- Capital Appreciation:
Equity investment provides a broad scope for capital appreciation. This is the cause; if the organization brings in profit, then it could reinvest that money back in the business to promote additional growth. As the market share increases, it will encourage the growth of the company as well as new product development. Gradually, as the company value will increase, so will the market price of its stock.
Sometimes, older companies exhaust avenues of growth. So instead of reinvesting their entire profits back into the firm, they opt for paying a particular portion of it to the shareholders as dividends. These dividends can turn out to be a steady source of regular income if you invest carefully in some blue chip company's stocks. These companies are more recommended as they have a record of paying regular dividends during both bad and good economic times.
Stocks are a liquid investment since there are traded in various exchanges in the world and at all times. This means that you will always have access to a ready market where you can sell your shares. Stocks may not be as liquid as money, but when compared to real estate, they are more liquid.
Disadvantages of equity investment
Raising equity Finance can turn out too costly, demanding and also time-consuming. It can take away focus from the core business activities.
- Background knowledge:
Many don't opt to do a thorough background check on the business as they are putting their money in, and this can prove disastrous. The business will welcome this analysis useful, but a shady company will disclose information from the public.
- Business Form Requirements:
For businesses, there are legal restrictions which govern the ways equity financing and equity investors also have financial rights. These rights include a claim to proceeds from the sale of the company, distributed dividends as well as governance rights. This variety of reasons can end up diluting the ownership as well as control of the company and adversely affect management decisions.
Equity funds can prove to be a profitable venture if it is invested in carefully after analysis and thought. The returns on it can provide a steady income as well.