What is Equity Investment?

With all the recent talk, particularly in technology circles, of multi-billion dollar valuations, initial public offerings, and stock sharing schemes, it’s tough not to pay attention to the fast-moving world of equity investments. A form of investing that’s been around for centuries, equity investment is an easy, effective, and proven way to invest in public and private companies, firms, and businesses.

Equity investment can take several forms, and come about in several remarkably different ways. A popular way to invest in companies, and one of the most accessible, is to purchase their stock on an exchange or public market. This allows almost anyone to invest in a public company, becoming an equity investors purely through the fact that they own stock in the company.

There are also indirect ways, or earlier-stage ways, to become an equity investor. During the private years of a company, often the early days of a start-up or other firm, it’s often possible to trade skills, abilities, and labor for an equity investment. This is particularly true in technology companies, and has been the case with current market leaders such as Microsoft and chip manufacturer Intel.

In this guide, we’ll be looking at equity investment from two perspectives. The first perspective is that of the investor – the person or party that’s acquiring the equity in a company. We’ll look at the advantages they’ll see from an equity investment, the reasons for them to pursue this type of equity investment strategy, and its dividends. We’ll also look at its major setbacks and disadvantages.

We’ll also look at the company side of the equation, the business that’s being invested in. Equity investment has a number of advantages over debt-based investment and other forms of financing. As part of this guide, we’ll explore them in detail, examining how they can help businesses, a few key ways in which they allow for quick cash flow, and how the can assist with development.

In short, equity investment is acquiring stocks in a business, whether private or public. In a public company this is a simple process. All that’s required of the investor is a contact with a stock broker or investment firm. Through this middleman, an investor can purchase shares in a public company, holding onto them as they increase in value, decrease in value, and pay out stock-based dividends.

The primary advantage of this form of investment, for the investor themselves, is that it allows any person to capitalize on the growth and improvement in a company. If a company looks like it’ll see improved business, a carefully timed investment can produce a good return. Similarly, a company that pays out good dividends on its earnings is a good investment for long-term stockholders.

Then there’s the advantage for the company itself. By ‘going public’ through an IPO or initial public offering, a company can generate more capital for growth and development. This allows a company to make otherwise risky and expensive investments, including investments in technology, new types of business strategy, and products that could generate large amounts of long-term revenue.

Let’s also look at the earlier stage of equity investment – investment in a private company. While the bulk of equity investments are made on public markets, and in public companies, there’s also a large amount of equity investors that specialize in younger, smaller, and more volatile companies.

These investors aim to get in early during the investment and capital funding process, securing a share of the company’s stock at a significantly lower price than later-stage investors. Generally, an investor of this type can be split into two different categories. The first is ‘angel investors’ – early-stage investors that offer low amounts of money, and the second is ‘venture capital’ investors.

Angel investors allow a company to grow rapidly in its very early stages, putting up capital to the tune of ten thousand, one-hundred thousand, or one-million dollars. These small investments give companies the ability to purchase their initial infrastructure, hire staff, and have enough cash for a range of services. In many cases, they’re the most important investments a company can have.

They also allow angel investors to purchase large amounts of equity in a company at a very low cost overall, particularly when compared to other investors. This can produce a huge return for investors, particularly those that find a company at its early stages and see long-term growth potential.

Venture capital investors, on the other hand, typically wait until a company has a defined product or service before making an investment. They like to see realized potential, a growing staff quota, and a business that’s on the up and up. Most venture capital investments are in the millions, or hundreds of millions of dollars, and are for large amounts of a private company’s total stock offerings.

Both of these equity investment forms – public and private – have their advantages and downsides, both in terms of return on investment, accessibility, and value. It’s up to you to decide which is your ideal strategy, and to act on it to produce measurable, versatile, and lucrative returns.

A fast-paced, interesting, and potentially lucrative form of investment, equity investments are one of the most popular and effective ways to own a diverse portfolio of companies’ stock. Simple and sweet, they’re a must-have portfolio item for any serious investor.

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