An equity investment is a financial transaction where an investor buys shares in a company and becomes a shareholder. Through Equity Investment, an investor may earn his/her income from dividends or capital gains when the share price or book value of the company rises.
Equity Investment – PROS and CONS?
For bothan investor and the business owner, there are PROS and CON to an Equity Investment.
For Business Owner:
- Raising Capital: By issuing new shares, companies can raise additional funds to finance their expansion, research, development, or other business activities. These funds are crucial for growth and operational efficiency.
- Debt vs. Equity Financing: Companies can also borrow money from banks or issue bonds to raise capital (debt financing). However, equity financing through issuing shares provides more flexibility because it doesn’t involve interest payments. The raised capital does not need to be repaid.
- Ownership and Investor Participation: Investors who buy these new shares become partial owners of the company. They have a stake in the company’s success and participate in corporate decisions through voting rights.
- Dilution of Ownership: Issuing new shares decreases the ownership percentage of existing shareholders and promoters. While it provides fresh capital, it also dilutes the ownership of those who held shares before the issuance.
For Investor:
- Price Appreciation and Dividends: Investors buy shares with the hope that the company will succeed, leading to share price appreciation. Companies may also share profits with investors through dividends.
- Risk and Reward: Being a partial owner exposes investors to the risk of the business not performing well. If the company faces financial difficulties or goes bankrupt, investors may lose their entire invested capital.
