Equity investment is the purchasing of rights to share in the profits of a firm or project.
Methods of equity investment
Most people think of shares of corporate stock when they think of equity. Certainly, that’s one prevalent example. Preferred stock, although it bears some resemblance to debt, is really just a less risky form of equity.
Aside from that, there’s also private equity, through which investors buy into an enterprise directly. Thus, they dispense with any security underwritten by a bank or sold on an exchange. Private equity firms specialize in acquiring distressed companies they believe will soon turn themselves around. Venture capital firms are similar to private equity firms, but concentrate on early-stage companies. These new firms might just be good ideas on paper now but have great commercial potential.
In real estate, investors can purchase units in limited liability corporations, which gives them equity in a project. Importantly, that partial ownership afforded by those units is of the cash flows, not of the underlying property.
And of course, any individual’s stake in a partnership or sole proprietorship is also equity.
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