What are the causes of equity investment risk and control measures?

I. What are the causes of equity investment risk? From the market situation of equity investment in recent years, equity investment has created a two-way development opportunities for investors and fund-raisers to meet the balanced relationship between the flow of capital in the market economy. However, affected by subjective and objective conditions, equity investment is still characterized by obvious risks, and the common risks and causes are as follows: (a) Subjective risk The main body of equity investment consists of two major elements: the investor and the investee, with the former being the capital holder and the latter being the capital demander, and the main reason for the risk is the mistakes of the investment body's manipulation. First of all, the investor is not familiar with the investee's experience situation, blindly puts the capital into the enterprise, or lacks detailed budget analysis of the equity program, resulting in the distribution of equity income not reaching the predetermined target, these are the forms of risk caused by the investor's decision-making errors; secondly, the capital-raising enterprise fails in its daily operation due to the failure of the internal control decision-making, and is unable to spend the income to the investor in accordance with the provisions of the contract, and the equity investment program fails to perform within the specified period. Subjective risk occurs as a result of subjective judgment, decision-making implementation and other aspects. (ii) Objective risk China's market economic system is still in the reform stage, and there are still many risks in the financial capital-raising model, and some objective factors also cause equity investment risks, which are related to the market environment, national policies and other factors. On the one hand, the market environment changes caused by the price of stock trading up and down, when the price of equity is lower than the price of the investment capital, investors have to bear the risk of capital loss; on the other hand, the state of the financial market after macro-control, bank interest rates, stock prices, corporate decision-making, etc. will be different changes beyond the scope of the expected equity investment, is bound to bring a huge investment risk potential. Objective factors are unavoidable, which also means that the unpredictability of equity investment risk. Third, what are the effective methods of equity investment risk control? In view of the shortcomings of traditional investment decision-making, either the investor or the investee company, must do a good job of investment risk prevention and control. The author believes that the risk control of equity investment needs to be carried out from the preferred target, full investigation, reasonable budget, scientific decision-making, management follow-up and so on. (a) Selection of target Through multiple channels and multiple ways to understand the information of the investment target, and consider the selection of the investment target from the perspective of the growth of profitability and the sustainability of the business model. Equity investment pursues the safety of capital and long-term stable returns, and the ideal investment target is to bring investors sustained, stable and considerable returns. The key to selecting a good investment objective is to seek the best combination between profitability and risk. (ii) Adequate investigation Investors can entrust professional law firms, asset valuation companies, financial consulting firms and other organizations to conduct due diligence on the target company, but also through the banks, tax, business sector, the relevant personnel, or directly with the business executives to communicate with the target company's various aspects of the situation for a full understanding of the situation. The purpose of the investment investigation is to grasp enough information and data to reveal the explicit and implicit risks of the target company, which in turn will enhance the reasonableness of the equity investment and the profitability index of the equity project operation. (iii) Reasonable budget Even if the company is of high quality, if the price of buying equity is too high, it will still lead to a long payback period and a decline in the rate of return on investment, which cannot be considered a good investment. In order to prevent the risk of financial decision-making errors, investment in equity must be calculated according to the company's normal level of profitability to recover the investment cost of time, usually, the return on investment should be controlled within 10 years. The investor should implement budgetary control and income assessment of the investment project, and may use the cost method or equity method to account for the return on investment. (iv) Scientific decision-making The purpose of equity investment is not only to obtain investment income, but sometimes between companies is to strengthen the commercial ties, influence or control the investee company's major business decisions, such as investing in the upstream raw material supply enterprises or downstream distributors and other behavior. If the investee company fails to perform well or goes into bankruptcy or liquidation, the investing shareholders will have to bear the corresponding investment losses. Therefore, when making investment decisions, it is appropriate to use a combination of qualitative analysis and quantitative analysis, and try to use scientific decision-making models and methods to improve the scientific level of decision-making, and avoid subjectivity and blindness. To summarize, investors face investment decision risk, business risk, legal risk and so on when they make equity investment. The causes of equity investment risk are complex, and can be analyzed from subjective and objective aspects. For these risk points, investors can optimize the target, full investigation, reasonable budget and scientific decision-making measures to risk control, and try to reduce the risk of obtaining good returns.