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What is Equity Investment?

A broker checks the stock market to determine the value of an equity investment, the purchase of certain kinds of debt.
Most stock market investments are equity investments.
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  • Written By: Eric Tallberg
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 August 2014
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Investing in the stock market is a way of life in the United States, and most of these are equity investments. Even if a depositor in a bank or credit union has only a few hundred dollars in deposits, he or she is indirectly an equity investor through the bank's stock portfolio. This is a long-term stock investment strategy whereby profits are realized through dividend payments and capital gains accrued on the equity of a particular stock.

The great majority of equity investors do not actually hold the securities, or certificates. Instead, they have an account with a bank or a fund manager who has physical access to these stock certificates. Therefore, equity capital is money gained by a company in exchange for a share of ownership in the company. Equity investment is sort of a loan to the company that is paid back — or not — by way of dividends paid out of company profits or through the sale of ownership rights.

The value of a property, less any debts owed on the property, is what’s known as equity. In the case of equity investment, the property is in the form of stock certificates and any debt is actually devaluation of the security. This devaluation may be incurred by a number of causes, from financial to foolish.

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Professionally managed investment funds, such as mutual funds, are called pooled share funds. Though pooled share funds are the most common form of equity investment, individuals and institutions are also active in these investments through what are known as segregated funds. Equity investors in start-up companies are known as venture capitalists.

Ownership of shares of stock in a company does not ordinarily entitle one to the responsibilities and rewards of direct oversight of the company. Only those owning common stock in a specific company even approach direct oversight through voting privileges endowed by that particular type of stock. Such investment is simply a proportional share of the profits and/or losses that result from day-to-day management decisions of the company.

The opposite of equity investment is debt investment, where money is loaned to a company in a negotiated lending arrangement, as opposed to the issuance of stock certificates. The company itself is held up as security for the loan and profits from this debt investment are taken from interest on the loan rather than company profits. Banks make loans as well as investments, thus a depositor in a bank is indirectly a debt investor as well as an equity investor.

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subway11
Post 2

Thula-I'll answer your question. Most portfolios that contain equity investments usually have mutual funds or stocks. These are the most common equity investments for the average investor.

Now if the investor were looking into hedge funds for example, they might have private equity investments. Hedge funds are exclusive investment vehicles that invest in private equity.

This simply means that they invest in companies that are established and that are financially struggling. Most of these investors need an average of $1 million to enter most of these growth equity investments.

People that invest in private equity investments hope that these companies will turn around and become profitable again. Many hedge funds focus exclusively on this market. A small investor purchasing mutual funds or stocks can do the same by focusing on companies that are financially struggling.

For example, General Motors would be a great illustration of a private equity investment. This is an established company that is reemerging and might be very profitable in the future.

Venture capital investments are the opposite of private equity investments. These investments focus on new up-and-coming companies that might turn a profit in the future. Companies offering an IPO or initial public offering are examples of these types of investments.

thula
Post 1

What effect does an equity investment have on a portfolio?

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