What is Disinvestment?

5paisa Research Team Date: 07 Jun, 2022 03:54 PM IST


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Disinvestment is the opposite of investment. Disinvestment is an intentional effort to reduce, usually by force, something that was previously invested in. For example, disinvestment happens when a country's government tries to undermine or remove foreign businesses from its country.

Source : Business Today

Even though disinvestment is often political in nature, it can also be financial. For example, some countries have disinvested from their own companies by selling off their shares. And on a smaller scale, many investors choose to disinvest from companies that they don't think are doing well.

What is Disinvestment?

Disinvestment is a process of reducing one's investment in a business. In most cases, disinvestment refers to the withdrawal of capital from a business by its owners. The most common situation in which this occurs is when a company is being sold or broken up, and the existing owners reduce their exposure to the company by selling part or all of their shares.

Disinvestment can also occur when a business is a subsidiary of a larger corporation. In these cases, the parent corporation may exercise its right to purchase stock in the subsidiary at the current market price, usually as part of an effort to reduce expenses and increase profitability.

In some cases, shareholders may disinvest simply by selling their shares on the open market. This is most likely to occur when they expect that the stock price will decline as a result of poor performance on the part of the company itself or changes made by management. Furthermore, some shareholders may be forced to sell their holdings if they need cash and cannot obtain it any other way.

How does Disinvestment work?

Disinvestment refers to the selling of stocks or bonds. The selling of stocks usually happens when investors are pessimistic about the future of a company. In contrast, the selling of bonds occurs when they are worried about the financial health of a government, municipality or other entity that issues them.

A company disinvests when it no longer wants to be associated with something or someone. For example, a company disinvests in a project if it is no longer profitable or if it has become controversial. Disinvestment can also refer to cutting funding for programs, people or organizations.

Loss of confidence in an organization is often accompanied by loss of investment. The two are sometimes used interchangeably, but not always.

Example of Disinvestment

Many companies don't want to be associated with tobacco products because they are harmful and difficult to market to consumers. As a result, tobacco companies have started to disinvest in their own brands by selling them off so they can funnel resources into healthier products. This is also true in the case of fossil fuels and carbon emissions. Companies like ExxonMobil have begun selling off assets, so they can invest in renewable energy sources instead. This may be due to consumer preferences, government regulation or both.

Causes of Disinvestment

Disinvestment is the opposite of investment, and it has occurred in many industries. Several factors can cause disinvestment; here are some of the leading causes::

  • Business failure- A business fails due to poor management, lack of capital or other reasons. The owners or shareholders may then sell their assets to pay off debts.
  • Carrier divestiture- When a company decides to sell its network assets to another operator, it is known as Carrier divestiture. For example, when MCI decided to sell its network to Verizon, it was a major carrier divestiture.
  • Carrier exit- When a carrier leaves a market or decides not to serve customers there any longer, disinvestment may occur if another operator does not enter the market immediately.

Market consolidation occurs when one company buys out another company, resulting in fewer competitors in the industry overall. Industry mergers are common during times of deregulation, and they often lead to disinvestment as redundant facilities are closed or sold off by newly formed companies. Cost savings are realized through reduced overhead costs, greater economies of scale and increased control over supply chains.

Forced divestiture is the legal process against which companies must defend themselves when government rules dictate that they must split up their assets

Why do companies disinvest?

A company can disinvest by pulling its assets out of one business or industry and then using them for another purpose. For example, a company might sell off its assets in one area and use that money to create a new product line in another sector. Or a company might sell off its assets and use the proceeds to buy back stock and increase shareholder value.

Disinvestment can also refer to the process of selling assets entirely and getting out of a certain business or industry. This is usually done when companies feel that there is not enough profit potential for them in their current line of work.

A reduction in capital inflows from one company into another results in less money available for investment purposes and a slowdown in business operations as a result.

What does disinvestment mean for our economy?

Although it's not something you hear being discussed every day, disinvestment has a significant impact on the economy. When companies stop investing in their businesses, they can begin to lose money. And when a company loses money, it may have to cut jobs and shrink operations, which can have a ripple effect on other businesses in the community.

Admittedly, disinvestment isn't something that happens overnight. The process can take years, and sometimes its effects don't become clear for a decade or more.

In economics, disinvestment takes place when money moves from one industry or region into another one. When an investor chooses to change the area in which money is invested to another area, this process is known as disinvestment. This can also happen if an investor liquidates assets and uses the money to invest in something else. Disinvestment takes place when investors move their money out of an area and move it into another area.

Wrapping Up

Disinvestment is simply the opposite of investment. It means that a business, government, or individual no longer invests in something — and the effects of that disinvestment can be varied and far-reaching. As seen above, this term is usually used when referring to businesses, stocks or other investments that have not been doing well in the market.

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