Equity Investments - What is Equity Investing?

Equity Investments are transactions based on buying shares of various companies. In this article we focus on purchases made on a non public market, which happen to be very interesting part of an Investor’s work.

Buying shares of various businesses is not difficult. Internet is full of businesses seeking capital, many newspapers contain adverts with such opportunities and word of mouth passes the information about “a friend of a friend” who needs financial resources for his company. The hardest part of equity investment is to properly estimate the risks, profitability and the general sense of transaction. After all, the Art of Investing consists of selling with reasonable profit and minimalizing the risk.

Investing in companies, especially those not listed on stock market, is connected with a greater risk. Therefore anyone considering such investment should take a lot of time to define and analyze project’s safety. One should remember, that not only the business model can turn out to be a disaster, but also there are always risks of key human resources illness or death, risks of a fire, thievery and law regulations change. Finally, everyone investing in companies should be aware that there is always a change in an economic situation and what happens to be a good business now, might collapse 12 months later.

If the risks are known, a professional Equity Investor always analyzes profitability of the business in compare to some other investments. If financial forecasts show that premium for risk in particular investment project is just 1-2 % higher than government bonds interest rate, then this investment might simply be not worth of a hassle. Most of the investors aim for 20-30% or higher return on investments when operating on a nun-public market.

Finally, once all the perspectives and threats are checked, a smart Investor should plan an exit from this enterprise. Usually equity investments exits are done within 3-7 years from the transaction date. This has to be planned since very often other business owners block the sale of shares by an Investor and therefore privilege of exit should be put into the investment deal (it can be done for instance by using “Drag Along” and “Tag Along” rights).

Equity Investments are very specific and hard to procure transactions, which also might result in great returns. Therefore they should be a result of a precise analysis and everyone who wants to become a successful Equity Investor – has to learn how to do it.