Are you planning to invest in securities issued by business corporations, such as preferred stocks, corporate bonds, or common stocks? Maybe you’re going through a few case studies on private organizations because you’re thinking about investing in your company. Regardless of what you do, when you move down this path, you will inevitably encounter a holding company. In reality, some of the most successful companies that currently exist today are holding companies.
Are you wondering what a holding company is? You and many other business owners like you want to find out the answer. You will surely run into a straightforward and simple answer to your question, but if you’re thinking about investing in a holding company, then you need to gather as much information about these firms as possible. That’s why you must go through this topic to the end.
A holding company, as understood by the designers of the online invoicing application that you use, is a company without operations, activities, or other active businesses. Instead, it owns assets. These assets can be stock shares in other corporations, including limited liability companies, private equity funds, limited partnerships, public stocks, hedge funds, real estate, bonds, brand names, trademarks, copyrights, song rights, and almost everything else valuable.
How it works
Holding companies are indeed unique, as you can contemplate from the definition given above. It doesn’t do anything itself but owns assets. The term “holding company” originates from the fact that the business has only one job to perform, and it’s about “holding” investments. If you go back to the past, you will find many examples of exceptionally successful holding companies. Some of them are Loews, Allegheny, The Marcus Corporation, Walton Enterprises, Berkshire Hathaway, and Cascade Investment. A few modern-day holding companies are General Electric, Bank of America, Johnson & Johnson, etc.
If you consider the Bank of America, then you will find that it owns control of the stock of several other private organizations, including insurance businesses, eponymous banks, securities underwriters, asset management companies, and more. It means that when you buy the shares of Bank of America on the New York Stock Exchange, the company you’re buying into won’t do anything itself. It merely acts as a conduit through which it will control and own the stock of all underlying businesses.
Financing
The designers of the best online invoice Portal say that the management team of the holding company decides where to invest its money. Since a holding company doesn’t do anything apart from hoarding assets, you may be wondering how it earns money. Well, the company can obtain funds by selling equity interests to the members or its subsidiaries. The company can also borrow money. It can even earn revenue from payments received from subsidiaries in the form of distributions, dividends, rents, interest payments, and payments for any back-office support that it provides.
Using a holding company
As the owner of a business, you can use holding companies. A holding company doesn’t restrict itself to specific businesses of particular sizes or industries. It remains open to all. Some of the most renowned publicly traded corporations are holding companies. Also, many people end up buying their stock without realizing the fact that they’re investing in the holding company and not the operating company.
While a holding company structure is extremely popular among large business entities with multiple business units, it’s open to all. When it comes to massive corporations, the owners can consider structuring their enterprises with one holding company and several subsidiaries. The owner will operate every unit as a separate subsidiary and the holding company will own a controlling interest. It’s possible to place the company’s trademarks, equipment, and real estate in separate subsidiaries. The operating firm will pay the holding company to use the trademarks, rent offices, or lease the equipment.
When it comes to small businesses owned by entrepreneurs, holding companies can extend their helping hand. For instance, a person wants to purchase an apartment building to earn through rentals. In such a situation, two different business entities would come to play. The entrepreneur’s LLC will own the apartment building and the holding company would own the LLC.
Things to know
The designers of an excellent online invoicing application say that people who want to merge their business with a holding company should pay attention to a few terms. These include;
Diversification: A few holding companies have holdings across multiple sectors and they offer diversification. Several advantages come with investing in a holding company because they diversify the risks. Holding companies generally own stocks across various sectors and they offer balanced exposures.
Discounts to market value: Holding companies can often trade by offering discounts to their market values. For example, a holding company called “XYZ” trades at Rs. 160/- and holds shares of listed companies “X” and “Y.” Both “X” and “Y” trade at Rs. 100/- each. It means that “XYZ” should trade at Rs. 200/-, but it isn’t the case. The gap of Rs. 40/- is the discount and it occurs because financial information of unlisted companies remains unavailable.
Value creation: Upon listing an unlisted subsidiary, it creates value for the shareholders of the holding company. In specific cases where one is expecting a major spin-off in the holding structure in the near term that can lead to shareholders securing shares of the constituent companies, the business owner can consider holding companies. Holding companies can provide handsome returns if you can ascertain the perfect time to invest.
Dividend: Dividends are the key to holding companies, as observed by the creators of the best online invoice Portal. Then again, if the company doesn’t have a majority stake in its subsidiary, then it could lead to increased taxation. As an investor, you need to look at the holding company’s dividend records.
Conclusion
As you can see, investing in a holding company isn’t a fly-by operation. There is much to know and learn before you make your move. You should try to search for more information before you invest even a dime.
