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Have you ever thought about how equity investment operates? If yes, you’re in the correct location.
This article discusses the concept of equity, its main types, analytical methods, and other important aspects for a comprehensive understanding of this indicator applicable to companies and other investments.
If you are intrigued by this topic, continue reading!
What does equity mean?
Equity is a flexible term that encompasses a range of definitions. In accounting, it commonly denotes the equity or net equity of a business, which signifies the disparity between its assets (goods and rights) and liabilities (obligations) as listed in the balance sheet.
Investments involve owning a company, whether it is publicly or privately owned. In publicly owned companies, ownership is through shares, making shareholders partners. In privately owned companies, ownership can be acquired through private equity, venture capital, or crowdfunding.
Ordinary shares grant voting rights in shareholders’ meetings, while preferred shares offer a 10% higher dividend payout compared to ordinary shares.
Significance of fairness for businesses
Financing options available
Every business requires funding to support its operations and growth strategies, connecting companies seeking financial support with investors willing to invest in exchange for returns.
Talent attraction
Equity has the benefit of drawing in skilled workers and keeping valuable employees by providing them with a stake in the company through stock options, motivating them to help achieve the company’s long-term success.
Equity and the stock market
There are two primary methods to regain equity: selling shares when the company is profitable and receiving proceeds through various distributions like dividends, interest on equity, and subsidies.
It is important to recognize that this index signifies an investment with variable income, regardless of the manner in which these profits are acquired, as the company’s future performance is not assured.
Private equity versus venture capital
Two widely recognized forms are private equity and venture capital.
Both are designed for companies that have not yet gone public on the stock exchange, but they differ in terms of the company’s sector, its growth stage, and the extent of new investors’ participation in management.
Shall we view each one?
Private equity refers to investments made in privately held companies or in public companies that will eventually become private.
Private equity is suitable for businesses in traditional industries that are typically smaller and less established compared to major companies. By receiving new investments, many of these businesses are able to experience significant growth within their sectors.
Those involved in private equity typically have prior experience in the industry they are involved in. They look for partners to assist with expansion projects and potential restructuring. Private equity involvement often enhances a company’s governance, possibly paving the way for future considerations of going public on the stock exchange.
Private equity funds typically involve a significant level of control over the invested assets, allowing investors to benefit from the expertise of managers who remain with the company throughout the investment period.
Venture capital refers to financing provided to startup companies in exchange for equity ownership.
Venture capital primarily targets high-growth companies, particularly fintechs, to help them prepare for an IPO or potential acquisition/merger in the future.
Many of these companies are in their initial phases, with some not generating revenue yet, meaning they may require greater investments for an extended period, increasing the risk of the investment.
When discussing venture capital, the main emphasis is on financial investment rather than direct involvement in managing the business. Typically, these funds invest 10% to 20% of the company’s capital in initial rounds, with the partners taking the lead in strategizing.
Equity crowdfunding is a method of raising funds.
This type of investment, also known as collective investment, is becoming more popular in Brazil recently despite being relatively unknown.
Value of ownership stake
One method to assess a company’s worth is by using equity value, also referred to as patrimonial value.
Calculating equity value is straightforward – you add up all assets and then subtract the operating debts. This helps determine the company partners’ ownership and assign the respective value to each.
The analysis is becoming more intricate as it involves various factors such as the industry, stage of business, and requires a detailed evaluation of each unique case. Additionally, linking the analysis with other indicators can be beneficial.
How can one invest in stocks?
This kind of investment is typically carried out through specialized funds. Initially, companies eligible for investments are selected, followed by a thorough evaluation of all projects and the risks involved by managers.
Private equity funds are restricted to qualified or professional investors because of their high risk and low liquidity. Qualified investors have investments exceeding one million reais, while professionals have at least ten million reais invested in the financial market.
Collective investment enables small investors to enter the market with lower initial investments, typically ranging from R$500.00 to R$1,000.00.
The investor can access crowdfunding platforms directly, where the top projects have been pre-selected. These platforms offer detailed information on startups, such as business plans, partner credentials, and projected outcomes.
In summary
Equity presents an appealing investment opportunity that enables you to engage in the progress and achievements of companies at various developmental phases.
It is crucial to recognize that regardless of the method you select, this is a high-risk investment that should match your investor profile.
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