Investments are an integral part of entrepreneurship. This phenomenon is significant both for a single company, and for entire industries, and even for the entire state. Classification of investments is carried out according to a variety of criteria.
There are direct investments, and there are so-called "portfolio" ones. How do they differ? What are the main features and types of portfolio investments? What is the role of foreign organizations and entrepreneurs in national economies? How significant are international portfolio investments? We will try to answer these questions, as well as to reveal a number of other nuances characteristic of the processes that accompany financial investments in business.
What it is?
Portfolio investments, according to the definition widespread among Russian economists, are investments whose purpose is to generate income by increasing the value of the financed asset. In practice, this most often means receiving some dividend payments or interest on stock growth. Portfolio investments, as a rule, involve the investment of financial resources within a certain share in the project. This is their difference from direct when all assets or their controlling part are bought in order to obtain the status of the sole owner of the company by the investor.
Portfolio investments include, as a rule, transactions related to the entry of the investor into the authorized capital of the company, as well as those associated with the purchase of shares and other securities. Who most often makes this type of investment? A wide enough range of entities engaged in portfolio investing: this there may be banks, funds, individuals, government organizations. Foreign investors and entrepreneurs can also be active investors.
Investments and stock market
It is widely believed among economists that portfolio investments are investments by individuals and organizations in stocks traded on stock exchanges. Can this point of view be considered legitimate?
To answer this question, we will determine what the stock market is. First of all, it is a mechanism for attracting additional liquidity. If enterprises want to increase their capital intensity, they issue shares and put them into circulation on a special kind of exchanges. As the investment received from domestic and foreign players grows, the value of securities increases. Behind it is the capitalization of the company and, accordingly, the scale of the business. If demand for stocks falls, then the value of assets decreases.
Thus, it is quite possible to agree with the thesis that cash investments in stock trading are portfolio investments. In addition, the attraction of financial flows within the framework of exchange trading is very significant in terms of the development of specific corporations, industries and even national budgets. That is, obviously, the subjects of economic processes at all levels are interested in having an investor come to them through stock trading.
Investment risks
Investing in a business almost always involves some risk. An investor, investing in a company, realizes that after some time his capital may well lose in value. The assets of a firm may depreciate. What are the most common portfolio investment risks? Experts divide them into a fairly large number of subspecies. Consider the main ones.
Country Risks
First of all, an investor, having invested in a business operating in the market of a certain country, may encounter manifestations of local, characteristic for a particular state, crisis trends of an economic or political type. In addition, even if there are no negative factors of one nature or another, the government of the country can, without prior notice to market participants, make some legislative adjustments to a particular industry. The new legal regime may well negate the feasibility of financial investments in a particular company or even industry.
Corporate Risks
Portfolio business investment may be an unsuccessful step if the entrepreneur who directs them does not assess the prospects for the development of a particular company well enough. It may well turn out that, given the favorable economic situation and the presence of a stable demand for products or services, the company's management will not be competent enough to conduct business.
"Diversification" of investment
Above, we talked about the risks specific to investment activities. What are the most effective mechanisms to prevent them? How to carry out portfolio financial investments competently? Experts recommend the following key tactics:
- to use, where possible, long-term and cheap loans (so as not to block current cash capital);
- as fixed capital, the investor should use exclusively his own funds;
- repay loans taken for investments in the business at the expense of dividends (and other profits), and not current capital;
- by investing in a business, try to minimize the cost of resources for managing a specific investment portfolio;
- reinvest profits primarily in repayment of loans.
Of course, this applies to those types of activities that do not imply exchange trading. The stock market trading policy is a “discipline” that is completely different from the classical financial risk management.
Legislative regulation of portfolio investments in the Russian Federation
A feature of the financial system of Russia is quite high, according to many experts, government involvement in investment processes. There are laws at the federal level (such as, for example, On Joint Stock Companies, On the Securities Market, On the Protection of Investors' Rights, etc.). According to Russian laws, portfolio investments are carried out as part of the following activities.
Brokerage services
This type of activity involves the execution of civil law agreements related to the circulation of securities. The broker works by proxy or commission.
Dealer Services
This type of activity is quite similar to the previous one. However, the dealer, unlike the broker, makes transactions on his behalf without using a power of attorney or order.
Trust finance
This type of activity is sufficiently close to the previous one, however, the right to transactions with securities arises from an entity that has received capital in trust, within a certain period of time. Also, agreements between the investor and the manager, as a rule, prescribe mechanisms of responsibility for the result of operations with cash.
Custody services
This type of financial services involves the storage of share certificates and other securities. Their owner (depositor), transmitting documents to the entity providing such services (depository), does not transfer any rights to capital management.
Activities of stock exchanges
Actually, this type of activity implies the organization of work on the correct and legal circulation of securities according to trading principles.
There are also additional activities with which the portfolio investment market intersects.Among the most significant for businesses is maintaining a register of owners of shares and other securities, clearing (accounting for financial obligations).
How does the state manage investment flows?
What are the practical mechanisms for the participation of the Russian authorities in regulating relations between investors and entrepreneurs? Experts identify the following channels:
- implementation of registration procedures for the issue of shares and other securities;
- legislative regulation of processes related to the operation of stock instruments;
- issuance of licenses to conduct activities for institutions engaged in the field of investment (funds, enterprises, banks, etc.);
- conducting certification activities related to the confirmation of the qualifications of financial professionals who work with securities.
The mentioned channels of work of state structures regulate the activities of not only Russian organizations and entrepreneurs, but also the sphere where direct and portfolio foreign investments are made.
Regulatory Policy Principles
Relations between Russian entrepreneurs and those who invest in their business should be built in accordance with a number of principles laid down in the laws of the Russian Federation. Namely:
- transactions related to the purchase and sale of shares and other securities are recognized as legally lawful and completed if the certificates and other documentary components of the contract are fully consistent with the law;
- Entrepreneurs and organizations are obliged to provide investors with reliable information regarding securities (prospects and current figures of profitability, subtleties of taxation, etc.);
- employees of government agencies and private financial organizations do not have the right to divulge information available to them regarding certain investment transactions and other procedures related to the circulation of securities.
Who regulates the circulation of securities in Russia?
Relations between organizations and investors in Russia are regulated by several government departments at once. These include:
- Ministry of Finance of the Russian Federation;
- Federal Antimonopoly Service;
- The Central Bank (including the Financial Market Service subordinate to it);
- The Federal Tax Service.
Many experts call the Central Bank (the former Federal Securities Commission) the Financial Market Service of the Central Bank as the key agency regulating the investment sphere.
Investments and the international market
As we said above, investors can be not only entities that have citizenship or registration in the country where the business is an investment object. In many cases, these are also people and firms from other states. Regarding the Russian market, foreign players make direct and portfolio foreign investments. In this sense, the Russian economy can be considered sufficiently open.
Foreign direct investment
Direct investments of foreign entrepreneurs and organizations are, as a rule, in obtaining a controlling stake in companies strategically significant for the country's economy, or, as an option, opening branches in major industries (in order to take a leading position in certain segments).
Portfolio foreign investments
There are also portfolio foreign investments made by business players from other countries. What does this type of activity represent? Investments of this type are, as a rule, investments in the securities of those companies that have the highest, according to foreigners, growth probability (both due to natural scaling and due to the attraction of capital on stock exchanges).
Some experts express an interesting point of view in this regard. They believe that portfolio foreign investments acquire significance for foreign entrepreneurs only if they have not been able to carry out direct ones. That is, to obtain strategic control over the assets of the company in a particular country.One way or another, this type of activity in the world is actively practiced.
As in the case of the activities of Russian financial residents, international portfolio investments are carried out in strict accordance with the legislation of the Russian Federation. The work of foreign financiers in Russia is also quite strictly regulated by the state within the framework of the mechanisms that we examined above.
Who is a foreign investor?
What is the legal definition of a foreign entity investing in companies registered in the Russian Federation? According to the norms of Russian laws, the following formulations are acceptable:
- a legal entity of foreign origin, the legal capacity of which arises by virtue of the laws of its state, having the right to conduct activities on the territory of the Russian Federation;
- organizations that do not have the status of legal entities, but have the right to invest in Russian businesses (also by virtue of the legal norms of their country);
- foreigners with the status of individuals with the legal capacity to work in Russia by virtue of the laws of their country;
- persons who do not have a passport of any of the existing sovereign states but having the right to invest in enterprises in the Russian Federation by virtue of the laws of the country that is their permanent residence.
Foreign organizations may also conduct activities related to financial investments in Russian businesses in accordance with international treaties of the Russian Federation, as well as foreign states (in accordance with the norms set forth in federal laws).
