In certain stages of a company’s development, the need arises for additional capital, which may come in the form of equity capital – i.e. by involving a strategic or financial investor.
A strategic investor usually wants majority shareholding and is ready to contribute to the company’s development both financially and with actions. A financial investor usually wants to remain a more passive shareholder, who supervises and has a vote in more important decisions, but does not get involved in daily business.
Additional equity capital allows the company to get new capital for financing development plans and also enables the existing owner to carry out a partial exit.
Raising equity capital may take place in the form of a public offering through the stock exchange or non-publicly i.e. in negotiations with carefully chosen counterparties. A public offering improves the company’s general management culture, the company’s reputation in the eyes of its partners, creates a new loyal customer base from investors – and more importantly, creates the basis for raising new capital at any point in time.
An opportunity for an investor
A share investment is an opportunity to acquire a holding in a company with the entailed benefits and risks. A successful company’s revenue from ownership should considerably exceed the sums paid for bonds and other loan commitments, which means that the return on a share investment is usually higher than that of bonds. But as the company’s owners are the first whose assets will decrease in case of a potential loss, then share investments also come with higher risk.
In case of a profitable company, business activity produces extra resources and these are either reinvested in the company or paid out to the owners as dividends. In the first case, the return eared by shareholders should be reflected in a higher share price. Therefore, share investors should have a clear understanding of the company’s expected dividend policy, because if the aim is to keep earning on the investment, it is worth preferring companies that divide profit.
Unlike a bondholder, it is quite complicated for a share investor to forecast the expected return, because it depends on fulfilment of growth forecasts and also changes in the general investment environment. Due to this, an investor should carefully consider whether the growth expectation justifies the share price level. Example: in case of a share with a100-euro market price, the company’s profit should be at least 10 euros per share to earn 10% return. If the company’s current condition does not support that, then an investor should expect a considerable increase in future profit, which would justify the current price level. At this point, it is important to carefully consider whether the company’s business strategy and team support these ambitions. The shorter-term the investment, the more important it is to also monitor events affecting the general investment climate and prices on stock markets.
In addition to the company’s financial results, general investment climate and share pricing, trading statistics should also be monitored. For the investor, the goal is probably to realise the investment sooner or later, so the investor needs to be clear on the security liquidity. Shares traded in the Baltics are listed either in the stock exchange main list, additional list or on the alternative market First North. Companies whose shares are traded in the main list have to follow more stringent conditions regarding information disclosure and reporting and this should lead to better informed and protected investors. But it does not necessarily mean that it is easier to sell your securities on the regulated market. It is worth keeping an eye on the spread (the difference between the purchase and selling price) and compare the size of your investment to the daily trading volume, for example.