What Is Equity Investment and How Does It Work?

You hear the term ‘equity investment’ and think, ‘oh no! not math all over again.’ Or you might not have heard the word at all.

Equity investment is a way to earn passive income.

Equity investment is simply the purchase of a company’s shares on the stock market with money. Once this is done, you become a shareholder for that company, giving you ownership equal to your purchased amount. You begin to ask, so what good does this serve me? Well, you as an owner get a share in all the profits and losses the company makes. This is termed dividends. Capital gains also arise from the disposal of shares, where the market value of the company rises. An investor also enjoys other benefits like discounts on new share purchases, bonus shares, and a high-buy-back share rate.

Let’s break down how equity investment actually pans out in the real world.

The stock exchange is a market for companies to sell their shares. It is also a place for other shareholders to sell their shares. To make profitable investments, aspiring investors do their research and employ the use of equity investment tools like Carta, Stock Market Eye, Fairmint and other MRI software to do the market analysis and pick out the best investments. Then they move ahead to invest in the most profitable option. Moreover, Fairmint provides an easier platform to do this; they enable companies to provide a unique investment experience on their website using the Fairmint blockchain technology.

Equity investments can be divided into individual shares, equity mutual funds, and private equity investments.

Individual Shares

Individual shares, as the name implies, exist on the retail level. Here, investors-acting alone- purchase shares from the stock exchange, i.e., buying from listed companies. They can also purchase from private entities, but such transactions are off-the-market. The key feature here is the investor is wholly responsible for all the shares purchased. There are no intermediaries like fund managers to help manage risk. Therefore, the investor must have adequate knowledge of the stock market before putting their funds in. The risk involved is very high because the company’s performance has an immense impact on the shares invested. Such influence can be positive or negative – increasing uncertainty.

Equity Mutual Funds

Going further, equity mutual funds deal with investors on a larger scale. They are called institutional investors. Equity mutual funds are a pool of shares from different companies aggregated and sold to investors in units. This type of equity investment allows investors with little knowledge of the stock market to still participate in stock trading. It also gives room for the benefits of diversification to be enjoyed. The risk that a company’s performance would be lower or no dividends will be issued out is significantly reduced as the shares of other companies will cover the losses. Thus, serving as a hedge. Additionally, an investor involved in equity mutual funds gets to have a professional fund manager assessing and analyzing the investor’s risk.

Private Equity Investments

Private equity investments involve investing in businesses not listed on the stock exchange. Such businesses are called private entities as they do not offer partial ownership of their company to the public. Investing in most of these entities requires a vast amount of capital associated with very high risks. The reason for this is these companies are mainly at the starting stages. For this reason, most investors are high net-worth individuals.

Therefore, they can afford to provide such capital and also bear losses. Investors here range from venture capitalists to real estate investors, angel investors, and growth capitalists. Venture capitalists invest at the cradle stage of a company and require a significant portion of ownership in return. Real estate investors deal with the acquisition and development of real estate and properties. Growth capitalists are exactly like venture capitalists, except they deal with established companies. Finally, angel investors provide all of the financial backings for a startup in exchange for significant partial ownership of the startup.

While it is essential to know the types of equity investments available, knowledge of their benefits and demerits helps in decision making and analyzing.

Apart from the high returns on investment, an investor benefits a lot from diversification, especially in an equity mutual fund investment. He can offset losses with gains derived from shares in high-performing companies.
Equity investments might seem like a complex concept, but it becomes simplified with the help of fund managers. Now, you know a bit about equity investments and can start earning that passive income you deserve.

Using some of the mentioned tools, engaged customers can purchase shares from companies that they love and build wealth as the company grows.

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