A holding company is a type of business entity that holds outstanding stock in other companies, therefore not offering any goods and services of its own. Due to the fragile state of the economy, holding companies are subject to decrease in profitability, as some of the companies they own stock in are likely to face bankruptcy.
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The downside of a holding company
The main feature of holding companies is that they hold outstanding stock in a number of different companies that may or may not function within the same industry. Companies are able to own stock in a variety of areas and industries such as banking, shipping and forex, amongst others.
This feature is often regarded as the most advantageous aspect as it safeguards the holding company from specific industry crisis, for example; XYZ holding company owns stock in shipping and banking. A fall in stock for the shipping industry would result in a great reduction in profit however as XYZ holding company owns stock in the banking industry as well; the fall in shipping stock would not have a great affect on the holding company’s overall profitability. This proves to be the main disadvantage of holding companies as the management is not able to specialize in each industry, and their limited knowledge in each area may result in poor decision making and management.
In the event that a holding company owns outstanding stock in just one particular industry, they are subject to facing complete liquidity and a reduction in profit in the event of turbulent markets. The uncertain state of the economy can result in a crash in one particular industry which can have detrimental effects on the holding company that owns stock in that specific industry. Individuals and companies are advised to buy stock in different industries in order to avoid facing a large loss and, essentially, reduce the risk of declaring bankruptcy.