Difference between direct and portfolio investment.

Investments are of two main types - direct and portfolio. What are the features of both?

What is direct investment?

This type of investment involves the conclusion of an agreement between the person investing money in the project and the company that implements it. According to this document, the investor will be able to participate in one way or another in the management of the company or influence the decisions taken by its management.

Direct business investment can be expressed in the fact that the investor acquires a controlling stake in a company, after which he receives the right to appoint his own people to the governing bodies of the organization, or even to register himself for any high-ranking position in the firm.

An investor who has gained control over a company or is entitled to participate in making key decisions by its management can profit not only from dividends and interest on the growth of share prices, but also on the basis of distribution of the company's profits.

Direct investments, as a rule, have a clear focus: the corresponding funds are used to purchase or modernize fixed assets, expand the staff of the enterprise.

An investor who interacts with a company according to the scheme under consideration usually expects a profit in the medium and long term. Therefore, direct investment is always welcomed by any entrepreneur - he can count on the fact that the funds will not be unexpectedly withdrawn by the investor in the event of a slowdown in the development of the enterprise.

In addition, people who invest in companies through direct investment, as a rule, have the highest level of competence in a particular area of ​​business. Therefore, the fact that an experienced investor or his invited managers come to manage the company is usually perceived positively among the owners of the company. For them, a competent person in management is almost a more significant factor than increasing the company's capital through direct investments.

What is portfolio investment?

This type of investment is the acquisition of a share of the company's shares, the size of which is insufficient for the investor to have the right to influence the decisions made by the management of the company.

Investments in the framework of portfolio investments, as a rule, are designed for the investor to receive income in the short term. It often happens that the corresponding financial flows are activated only at the stage of the fastest growing business. As soon as the pace of development of the firm slows down, portfolio investors begin to actively withdraw capital from the company.

Profit in the framework of the considered business financing scheme is paid usually in the form of dividends or interest on bonds.

The funds received by the firm under this scheme are directed for any purpose, and this is not necessarily the replenishment or modernization of fixed assets. For example, it can be an accelerated loan repayment or an increase in salaries for certain categories of managers.

Comparison

The main difference between direct investments and portfolio investments is that the former presuppose the formation of conditions for the participation of the investor in making key decisions by the firm's management on business development. This is possible due to the fact that the person investing in the company acquires a controlling stake in the company. This scenario is not typical for portfolio investments.

The fact that the investor is involved in the management of the business predetermines many other differences between direct and portfolio investment. Such as, for example, the waiting period for profit, as well as the method of obtaining it.

Having studied what the difference between direct and portfolio investments can be traced in principle, we will fix the main conclusions in a small table.

Table

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Direct investments Portfolio investments
The investor receives income both in the form of dividends and interest from the growth of shares, and upon the distribution of profitsThe investor receives income mainly in the form of dividends, interest on bonds
Designed to generate profit in the long and medium termDesigned to generate profit in the short term
As a rule, they are directed to replenishment and modernization of fixed assetsCan be directed to completely different purposes
.