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A direct investment – is an investment of money in tangible assets – capital goods, equipment, buildings and facilities belonging to the company or companies or shares in order to obtain investment income and participate in business management. In the context of securities, direct investment is the purchase of at least 10% of the company’s shares. This allows to enter the board of directors and influence the activities of the issuing company. In most cases direct investments are long-term.

A direct investment can be initiated by residents of the country in which the company operates, or by foreigners. A foreign direct investment is subdivided into outgoing – investments of residents of this country to a foreign company – and belonging – i.e. foreign residents invest in a company operating in another country. Besides, the level of incoming foreign direct investments is believed to reflect the investment and business climate in the country, as well as the potential of its economy on the world scene as a whole.

 

Objectives of direct investments

Direct investment, in fact, is a particular business financing, investments in its development and growth. At the same time the ultimate goal of such investments can be either making a regular profit from the business – dividends on shares, a percentage of revenues, etc., and the subsequent sale of the investor’s share of the assets or shares at a profit.

 

Direct investments are a good option for:

  • entrepreneurs who want to expand their business or business horizons
  • people who are ready to support a specific company or industry
  • those who prefer to see to whom and for what the money are invested
  • investors willing to long-term investments
  • those who can afford to invest large sums of money

 

Advantages of direct investments 

  1. The investor gets the opportunity to directly influence the investment object, make strategic decisions, and contribute to its development and, accordingly, the growth of future investment revenues.
  2. The investor accesses a wide range of instruments to manage his investments and expenditure of the invested funds.
  3. In the case of a foreign direct investment the investor can integrate his activities into the overall economic system of the country.

 

Disadvantages of direct investments 

  1. Direct investment involves sufficiently large amounts of investments which is not an option for investors with small capital.
  2. In order to make your investments effective it is required to conduct a thorough preliminary analysis not only of the relevant market situation and the value of shares, but also the plans, legal and financial documents of the company.
  3. Direct investments in capital goods and shares, in contrast to the portfolio investment, allow to make a profit only and exclusively in case of growth in the assets’ value.
  4. Direct investments often involve additional costs for maintenance of capital goods, modernization and repair.
  5. In most cases, you need a private, time-consuming involvement in the direct investment management.
  6. Low liquidity assets – sale of share packages, shares or material objects can take a long time.
  7. Early withdrawal of the total or part of the invested amount is extremely difficult in the event of unforeseen circumstances.

 

Direct investment instruments 

Direct investments are made in two ways: through financial transfers of a particular company or the purchase of its assets, as well as through private equity funds (Private Equity). Such funds select investment projects and companies independently, and then transfer the investors’ funds to support them.  The find closes  3-7 years after its  foundation, then its stake in the projects and companies are being sold, and investors get back the invested funds and profit from sales of the fund’s assets at the increased cost.

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