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Equity Investment: Everything You Need to Know

by Gloria Louden
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Many companies and business owners consider the use of equity investments in the financial run of their business because of a lot of benefits attached to it.

If you are thinking of investing, it would be beneficial to learn as much as you can about the whole financial process. Companies like Carta, Robinhood, and Fairmint offer a simple medium to do this. They provide an engaging platform which investors and business owners can use to trade equity. Even better, companies like Fairmint go out of their way and introduce a platform that allows investors to purchase stocks right from the company website anytime they wish.

In this article, you will get to understand everything you need to know about equity Investment.

Definition of Terms

Equity

Equity in business refers to ownership in terms of the net monetary value of the business. It also represents the total value that would be shared or returned to a company’s shareholders when all assets get liquidated or if all of the company’s debts get paid off. Normally, equity is derived by subtracting the companies’ liabilities from its assets. In short, we can say equity is the ownership of an asset after all liabilities connecting with the assets have been cleared.

Equity makes shareholders entitled to a company or corporation’s net profits and a measure of control such as the right to vote and be voted for.

Investment

It is a placement of capital in the expectation of deriving income or profit from the use of such capital or appreciation.

Combining the two terms, we could say an equity investment is money invested in a company usually by buying shares of that company in the stock market. Shares are pieces of a business, it is a financial instrument showing one owns a part of a company. It is also known as stocks. Stocks/shares can be bought privately or publicly which both depend on the structure of the said company. These stocks give right to the shareholders to the profits and assets of the company.

There is negative and positive equity in which the former is a case where liabilities are more than the assets while the latter is when assets exceed the liabilities.

Many companies and business owners consider the use of equity investments in the financial run of their business because of a lot of benefits attached to it.

Types of Equity Investment

Another important thing to learn about is the types of equity investments. Let’s talk briefly about them.

Individual Stocks

This kind of investment does not require any intermediary such as the manager or analyst. The decision is made by the investor himself using his discretion. The investor could decide to park his funds into one stock or more depending on what he prefers.

Equity Funds

This investment consists of several but related funds invested into the stocks and shares of companies. It is usually a collection of different equity stocks brought together to be sold as units to investors. Equity funds allow the investor to enjoy the benefits of diversification because it covers a broader base of equity investments.

It can be further categorized into;

• Active and Passive Funds: Passive funds are like the description above while active funds need the fund manager to keep working on the portfolio to be able to get a higher return than the benchmark.

• Growth, Income and Hybrid Funds: Growth fund is the kind of investment into stocks that has the potential for a high capital appreciation. Income funds involve investing into stable large cap companies that can provide dividends. Hybrid funds, on the other hand, offer a unique combination of growth and income funds.

• Market Capitalization: With market capitalization, you can have an idea of people’s opinions about a company’s net worth. You get this by multiplying the total number of shares and the prices.

Private Equity Investments

This is a large investment in stocks of companies that are not yet listed on the exchange. They are usually high valued tickets; hence they are only used by individuals of high net worth. Private equity Investments are usually practised at the birth of the business or during. It is also categorized into three.

• Venture Capital: It is an investment done at the cradle stage or inception stage of the company. The investors usually place a high premium on it such as the ownership is considerably them. The compensation is huge because it is a great risk involved.

• Growth Capital: It is kind of similar to venture capital, just that it is an investment into a growing company. They supply funds for the expansion of the business.

• Real Estate Funds: These are equity investments into real estates and properties. It is about acquiring, maintaining and selling real assets. The properties are sold during periods of rising value. The major stream of cash in real estate funds is renting out of the assets. It gives room to investors to enjoy the benefits of price changes in the properties without even buying any.

Benefits of Equity Investment

There are several benefits to enjoy in equity Investment especially to the investors. Here, we will share with you five ways to make your invested money back.

Dividends

You get to enjoy the benefits of shared rewards of cash for investing in the company’s stocks when the profits begin to roll by.

Capital Gains

You also get to share in the profits made on the sales of the mutual funds.

Capital growth

Increasing your capital is one of the primary benefits of equity investments. As a company develops and makes a profit, it usually reinvests the profit to grow the company’s portfolio. The increasing growth of the company causes an increase in the market price of the stock, leading to capital appreciation for the investors.

Diversification

Equity Investment allows you to diversify into any sector and make profits from it. As a result, you are protected from any consequences of putting all your eggs in one basket.

Conclusion

Now you know the basics of equity investment. However, do not be confused by the technical jargon of the financial industry. Nowadays, business owners and prospective investors can trade equity right on business websites anytime they want.

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