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What Is Equity Crowdfunding and How Can I Explore It?

21 Nov 2022, 04:33 GMT+10

It's not often you discover new investment opportunities emerging. Things mostly stay the same with stocks, real estate, and private investing. But with equity crowdfunding, things are starting to change.

Equity crowdfunding is the fastest-growing crowdfunding market. Believe it or not, it grew 33.9% between 2016 and 2021. The chances are also good that the trend will increase in the future.

Are you interested in diversifying your investments and think equity crowdfunding is the right choice? Read the guide below to learn what equity crowdfunding is and how it's helpful as an investment opportunity.

What Is Equity Crowdfunding?

Equity crowdfunding is a way for business owners to raise capital for a business. Business owners will seek loans from traditional lenders and private investors in conventional situations.

For traditional lenders, companies give away zero equity. They pay the money back over time with interest.

With private investors, business owners give away part of the company. A private investor gets a certain amount of equity and the right to take that amount of profit from a business.

Equity crowdfunding changes things by opening opportunities ordinarily available to private investors to the general public. A business signs up for an account at an equity crowdfunding website, uploads financial information, enters information about its product, and submits a funding request.

People can then browse those websites and offer capital to businesses in exchange for the equity offered. If a business gets funded, the crowdfunding platform takes a percentage of the funds raised for giving the company a platform.

Why Start With Equity Crowdfunding?

Now that you understand what equity trading and crowdfunding are, the question becomes, is it a great investment opportunity? Read on below to learn why it makes sense to take advantage of these opportunities.

Find Smaller Opportunities

One of the biggest problems with private investment is that you don't always find smaller opportunities. You need a large amount of capital to get started and may not be able to find companies that are looking.

The same isn't true for crowdfunding equity investing. You can see countless companies looking for funding on crowdfunding platforms. That means you have many more options and may be able to get started with less capital.

Of course, depending on your chosen route, there may be a few restrictions. You may need to look into becoming an accredited investor before you can legally start on a few platforms.

More Diversified Portfolio

While spreading your risk across multiple stocks is a great way to diversify your risk, you're still counting on the stock market to stay afloat. If you've studied the market's past performance, you know that there's always the chance that things will come crashing down.

You don't want all your eggs in one basket when this happens. Investing in equity crowdfunding projects gives you a chance to spread your risk.

Since you don't need a fortune to do this, you can put money into several companies that look good. They may not all work, but you'll likely pick a few winners that make investing in crowdfunding companies worth the money.

Larger Potential of Return

With the success rate of small businesses not that high, it won't be a surprise to see some of your investments go to zero. However, that doesn't mean you won't see any success.

Even better, the potential return on your investment may be higher than anywhere else. You never know if a company you invest in will take off and grow huge. You can make a lot of money if you have an equity stake in that company.

That means you have a larger potential for return when you invest in a business for equity. Over time, these successes may add up to much more turn on your money than a traditional investment strategy.

Make a Bigger Contribution

One big issue with buying stocks is that you're buying an already existing company. They already have a product and have made an impact on the world. Stocks aren't a great choice if you want your money to do more.

Things are different when you fund startup companies. You can find many crowdfunded equity companies that promise to do a lot with what they offer. In some cases, small businesses looking for investors are pushing new innovations that large companies won't touch.

This means you have a real chance to make a difference by investing in smaller companies. You'll be on the ground floor for new innovations and can help bring positive change to the world.

See Tax Benefits

Crowdfunded equity investments aren't only a great way to see future returns. They're also a way for you to save money by reducing what you pay to the government.

You're probably already aware of some of the tax benefits of regular investing. Take something you sell at a loss, for instance. You can deduce your losses over the years to reduce your tax burden.

In normal situations, you can take off a maximum of $3,000 on your losses. But equity investors may have more options that let them defer taxes on capital gains. This means you'll see more savings over time and have more flexibility with your losses.

Investigate Your Equity Investing Options Today

You can make great returns by sticking with traditional investments when investing money. But that isn't your only option if you want to diversify your risk.

Equity crowdfunding is a less-known option that can produce great returns. On top of that, you get to put your cash into companies that provide real value to the world. Be sure to check your options with equity investing to see if there is anything that looks good to you.

Head back to the blog if you want to read more tips that will help with financial investments.

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