Portfolio investment

economic-dictionary

Portfolio investment is one that is characterized by seeking a return in the future through the receipt of financial income, the distribution of profits or capital gains.

That is, portfolio investment aims to make a profit. This, waiting for the payment, for example, of interest, in the case of debt instruments, or the payment of dividends, in the case of shares.

Another way in which you seek to earn this type of investment, as we mentioned previously, is capital gains. That is, by the difference between the purchase price of an asset and its sale.

Another way of understanding the type of investment that concerns us here, within the framework of international capital flows, is as that investment that corresponds to acquisitions of financial securities.

Of course, always in a minority position. Otherwise, as we will explain below, we will be facing a foreign direct investment (FDI).

Difference between portfolio investment and foreign direct investment

The difference between portfolio investment and foreign direct investment is that the former does not seek control of the company in which it is invested. On the other hand, the second yes.

In other words, portfolio investment does not imply gaining a majority position in the shareholding of the company in which it is invested. Therefore, no dominance is obtained in the business decisions of that organization.

In contrast, foreign direct investment refers to when the investor is becoming the main partner of the company.

Portfolio investment examples

An example of a portfolio investment could be if a Spanish company acquires 2% of the shares of a Mexican company.

The foregoing implies that the Spanish firm becomes a minority partner of the Mexican company. Eventually, you expect to receive dividends or make a profit by reselling those shares at a price higher than their acquisition price.

Now, to better understand the difference with FDI, suppose that instead of 2%, the Spanish company acquired 51% of the shareholding of the other company. Consequently, it would become the new owner and maintain control over the management of the Mexican corporation. This operation would no longer be a portfolio investment, but a direct foreign investment.

Another example of portfolio investment could be when an investor acquires, in the capital market, bonds issued for three years by a company in the industrial sector. Thus, you expect to receive a coupon periodically and the principal to be repaid towards the end of the instrument period.

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