Equity investments explained

If you already invest or you’re planning to start investing, your main objective is most likely to be to earn a good return and grow your wealth. Equity investments are an option to consider if you want to diversify your portfolio, for example by investing in the stock market. On this page, you’ll learn what equity investments are, the different types of equity investments and why you may want to consider equities.

Equity investments mean you’re investing money into a company by purchasing their shares on the stock market. Shares are small portions of a company, also known as stocks. Once you have a share in the company, they can be traded on a stock exchange.

Owning these stocks entitles you to a portion of the profits and assets the company makes. This is a common process that allows an individual or company to invest money into a company and become one of its shareholders.

The key difference between the two is that with private equity, you invest in shares of companies that aren’t publicly traded, or listed on a stock exchange. With public equity, the companies you own shares in are already trading on a stock exchange. Additionally, private equity is a longer-term investment (funds typically have a fixed term of ten years or more) and investors are required to be high net worth individuals or accredited investors. Public equity can be a shorter-term investment with greater flexibility, as shares can be more easily bought, traded and sold.

There are several types of equity investments, including the following:

• Common stocks – an investor holds shares in a company and earns a return through dividends. As an investor, you have little control, which is why some consider common stocks to be a risky investment, but common stocks can produce a high return over the short term.
• Purchasing preferred stocks – this is a stable equity investment with no power granted to you for your investment. You receive regular dividends which are independent from the market.
• Warrants – with warrants, common stocks are available for a specific time period. If these stocks aren’t purchased, they might become worthless, but may provide good returns when bought.
• Convertible debt – this is a type of bond without collateral that you can exchange for common stocks. This debt is often priced at a rate lower than the regular stock price.
• Equity line of credit – this is similar to a bank line credit, meaning you can purchase common stocks over a period of time. The advantage you can gain from this type of equity investment is that the stocks purchased are bought at a discounted price.
• Sales of restricted shares – this refers to the stocks in a company that can be transferred to another person once they’ve met certain criteria.

An equity fund investment allows you to acquire partial ownership of a private company or a startup by owning some of their shares. Investors generally earn a return on their investment when a company they have shares in decides to distribute its proceeds after liquidating some or all of its assets. If the company has met certain obligations, they can then sell their shareholdings to other investors.

For example, let’s say a startup founder had an idea for a new product and wanted to create a company, but needed capital. A starting point might be for the founder to ask equity investors for funds. The founder would first have to convince these investors that the business idea can work and will be likely to bring growth.

The startup founder offers 10% of the company for £450,000. An investor counters the offer by asking for 30% of the business for a £450,000 investment. The founder agrees, and this means that the investor will own shares equivalent to 30% of the business.

You can purchase shares of a company on an exchange with the expectation (but not the guarantee) that its share price will increase in the long term. You may want to consider this type of investment if you think the company you’re investing in has the potential to grow. If you hold shares in a company that has seen significant growth, the value of its shares will likely increase, too. If your shares increase in value, you can then sell them and earn a profit.

Equity investment strategies vary depending on the target company stage. The following are the most common investment strategies used in private equity investing:

• Leveraged buy-outs are where a private equity company wants to acquire another company. The equity investment for this type typically requires a significant amount of equity and debt.
• Venture capital is usually for small businesses or early stage startups. This type of equity investment can have high returns, but also comes with high risks.
• Growth capital is designed for companies who are reconstructing or expanding their business. These are more reliable than other investments because the company may be well-established.
• Mezzanine capital is where the money is loaned for interest. It bridges the gap between equity and debt financing.
• Offshore equity investment is money invested in equities that are quoted offshore. Investors are exempt from tax, which is one reason to consider this option.

Shares of private companies are only available via private equity funds. They are usually reserved for professional investors who are able to invest a high lump sum for a long period of time. There are a few ways you can invest in public equities, however, and the most common way is using an online investment platform which offers equity funds or allows you to make equity investments. You’ll usually be asked to register and open an account. Once you’ve registered, you’ll be able to purchase stocks or shares of equity through a mutual fund or ETF by using a brokerage account.

Equity investments can provide strong returns, but it’s important to understand the risks that this type of investment can involve. These risks include losing some or all of the value of your investment, which might happen if a company you’ve invested in fails.

If you’re not comfortable with taking this amount of risk, you might want to consider other, safer alternatives to equity investments, such as savings accounts. Savings accounts are typically considered a much safer way to grow your money because with UK-regulated banks, your deposits are protected by the Financial Services Compensation Scheme (FSCS).