Are you Investing in Companies Business or Companies Equity?

A myth among investors is they think they are investing in companies business and this may sound true to some extent but is by no means the complete truth – at least not for the minority share holders.

Shocked!!!

Let me explain this with an example.

Say you invested in a company and the company goes bankrupt. What would be your investment worth? To calculate your worth, the company assets are liquidated and every share holder should get their part of it. As a minority share holder you will not get anything because the distribution of asset is not uniform. Majority share holders (i.e. holding more than 5% of company equity) gets their share first and whatever is left over would be distributed among the minority share holders.

Many people (who forgot the Satyam and Lehman Brothers scenario) can argue that bankrupt is not very common in India for large companies and so the above scenario can be totally hypothetical.

So let me share with you one more example.

Let say you invested in a great company and in few months that great company want to delist. You are having part of the equity capital of the company, so ideally the company cannot delist but in reality they can despite you (as a minority share holder) don’t surrender your shares to them. Why this has been done is a separate topic of discussion but as a minority share holder you have nothing much to say but to tender your share to the management or else it will become worth a big zero.

So unless you are investing more than 5% of the equity capital of the company you are actually not investing in companies business but you are actually investing in companies’ equity. The performance of equity of company can be at times near to the companies business but not always.

Share your thoughts in comments below.