What Is the Investment Holding Company Definition?
An investment holding company definition is an important term whether you are starting a business or growing an established one.3 min read updated on February 01, 2023
An investment holding company definition is an important term whether you are starting a business or growing an established one. Holding companies often come up when a company begins facing issues of investing in securities that are issued by a corporation such as:
- Common stocks
- Preferred stocks
- Corporate bonds
- Performing case studies in private companies
Many successful companies and corporations around the world actually function as holding companies. In general, a holding company will not perform any daily operations, activities, or functions for the business itself.
In essence, a holding company functions as a parent company, an LLC, or a limited partnership that owns enough of the voting stock in a company that it will actually have voting control over the policies and management of the company.
While a holding company will own a business, it will also own other assets in addition to it such as:
- Stock in other corporations
- Other limited liability companies
- Other limited partnerships
- Hedge funds
- Private equity funds
- Real estate
- Song rights
- Brand and trade names
- Other assets that may hold some value
The term "holding company" describes its purpose, which is to hold investments. Their sole reason to exist is to control other companies instead of producing goods or providing services. A holding company can also exist just to own specific types of property.
Two Forms of Holding Companies
There are two primary forms of holding companies. One form will serve as a vehicle for investors, and the other will serve as a risk management tool for larger corporations. When a business is completely owned by a holding company, it will be referred to as a wholly owned subsidiary. In this instance, the holding company has the power to hire or terminate the management that runs a company, but control of their operations will rely on the managers.
Even though the holding company is not involved in the day-to-day business operations of the companies that they own, it is vital for the holding company to understand each of the operations of their subsidiaries and necessary for them to evaluate the performance and prospects on an ongoing basis.
An example would be Johnson & Johnson, which is one of the most well-known and well-respected blue-chip stocks traded in the world. The company is actually a holding company, so when you buy shares in it to acquire stock, you are buying into a company that does not do anything in the more traditional sense.
In reality, Johnson & Johnson has the prime ownership stake in over 265 individual companies. This would be similar to the way a private investor would own several company stocks through a different business such as a brokerage house.
Johnson & Johnson owns the following three major types of businesses:
- Consumer healthcare
- Medical devices
While the companies that they own fall under one of these three umbrellas, each section is comprised of several types of companies that are actually on their own and located all over the world. They each hire their own employees, as well as maintain their own banking, offices, and manufacturing facilities.
The holding company Johnson & Johnson will have its own shareholders and board of directors that will act on their behalf and protect the interest of their company and its holdings. The board is responsible for determining the dividend policy for the stock as well as electing a CEO. Once the CEO has been named, they will be responsible for the people under them.
The board of directors of a holding company will have the responsibility for the hiring and termination of CEOs as well as other key executives of the subsidiaries that Johnson & Johnson controls.
A holding, or parent, company will also provide support for its subsidiaries by its ability to lower the cost of their capital due to their strength and power. Ways in which a parent company can provide a lower cost of capital to their subsidiaries include:
- Issuing them stock at what would be considered rock bottom rates.
- Lending them money at rates that would be significantly better than if they were to apply for funding on their own.
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