What is Equity Investment?
What are the benefits of equity investment? What should be considered before investing in a company?
Definition of Equity Investment
It is an asset that represents ownership interest, or part thereof, in an enterprise—the stockholder’s share of earnings generated by the business and other assets acquired with those profits.
Equity investment is also called capitalization or sometimes venture capital, with regards to private investments into start-up companies.
Benefits of equity investment:
There can be significant rewards to being an investor in your own business. If you have ever thought about starting up internet-based retail store selling products like t-shirts, then you may want to consider becoming an investor yourself instead!
You could do all the work and have some extra income while enjoying watching your online shop grow over time.
As an entrepreneur, there will always be risks involved in starting your own business. But when done correctly, there is nothing better than creating your own success story.
The main difference between a Loan and a Sale
A loan is usually given to purchase goods or services expected to generate revenue either immediately or within a short period of time.
If the company goes bankrupt before repayments begin, then the lender takes ownership of the asset. That means they can dispose of it however they choose – either keeping the asset, giving it away, or liquidating and keeping the proceeds for themselves.
On the other hand, a sale is recorded as soon as the seller receives payment for the item. They cannot change their mind later and decide to keep the item. So although the buyer might end up owning the item, the title remains with the seller.
Sales & Loans
- Selling Goods for more than what was paid for them
- Buying Goods for less than what was paid for then reselling them at a higher price
- Using borrowed funds to finance purchases
- Taking advantage of a temporary situation to acquire unearned benefits
- Lending Money to one who cannot afford it
Sale vs. Purchase:
If you went shopping for clothes and found an amazing pair of jeans on offer, how likely would you be to buy them now rather than waiting till next month when prices drop again?
Unless you know that you will never find another pair of pants as good as the ones you saw yesterday, chances are slim.
But suppose they were marked down by 75%.
Would you go out today and spend your hard-earned money on those trousers? Of course not. You have already decided what suits you best, so why bother changing?
This sort of decision-making is exactly the way people behave in the stock market.
They buy shares because their investment has been shown to increase in value over time, but they don’t think about selling anything until there’s a chance of making a loss. The reason is simple – they want to hang onto what they’ve got and make sure it keeps rising in value.
When stocks go down in price, most investors panic and get rid of everything very quickly just in case it falls any further. So instead of holding on to assets that may lose all their value overnight, they cash in and take a quick hit on the downside while hoping things pick up again.
It’s important to remember that no matter how much someone invests in the share market, they always hope to eventually see a return on their initial stake. Of course, some do better than others, especially with some exposure to the market and experience with the trends.
Most small investors start off with a single share, while larger companies invest tens or hundreds of thousands of dollars per year.
Needless to say, people choose where to put their money based on several factors, including risk, security, and potential reward.
Risk refers to the uncertainty surrounding the outcome of investing. Security relates to the ability to collect payments from buyers. Potential Reward denotes the level of growth and income the investor anticipates receiving.
Click here to read about Working Capital.