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Investment Dictionary


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Holding Company

 

Holding company is a type of a company which main activity is to invest in other companies. Holding as itself does not do any activity instead of managing their subsidiary companies and searching for new investments. Managers of holding company have to be top-level finance and investment professionals to achieve good results. The most known holding in the world is Berkshire Hathaway managed by famous investor Warren Buffet. 

 

Holding companies are buying different stakes of different sizes in other companies, but most of the time they are trying to get a control state to take over company’s management. Also the size of a stake depends on the tax system in the country because when parent company exceeds some voting share in subsidiary (in US 80%, in other countries usually lower) it does not have to pay a dividend tax anymore. 

 

Some holdings are investing in all sectors while others limit they strategy to some particular sectors in which they feel strongest. Every holding buys new asset if it expects that can create some value by this acquisition and financial situation allows it. Usually holdings are buying companies that are not well managed or are in trouble, and the main criterion is a good price. After the acquisition holding usually replaces the management of the acquired company and tries to make it more effective to achieve better financial results. Holdings are buying other companies on purpose to maximize the value of a company and sell it for a profit. Such period lasts on average 5-10 years but it also depends on the strategy of the holding. When management of a holding thinks that maximum value of some subsidiary is achieved it sells such subsidiary if succeeds. 

 

Investment in holdings

The shares of a holding may be listed in stock exchange or not, and it depends on shareholders of a holding if they have decided to go public. If shares are on the stock exchange, then every investor can chose to invest in such holding company. 

 

Investment in holdings advantages:

  • Investor gets the stock of which portfolio is already diversified and it reduces the cost of diversification for him.
  • If the management of a holding is effective and does a good job, then it creates additional value for shareholders.
  • Often investors can buy assets of a holding at a discount while holdings usually are trading cheaper than the value of their assets.
  • They tend to increase the value of their acquisitions by active management.

 

Investment in holdings disadvantages:

  • Holding’s management likes high salaries and it creates additional costs for shareholders of a holding. 
  • If holding has debts, it makes such investment riskier. 
  • You do not fully control where you are investing in, while holding can sell their assets at any time and buy new ones.

 

Basically, you should invest in a holding if you fully trust in company’s management, and you think they know how to invest better than you.

 






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