Glossary of Investment Terms
Confused by jargon? Our glossary breaks down key terms used throughout the learning center—use it as a quick reference.
The investment world is filled with specialized terminology that can be overwhelming for newcomers and even experienced investors encountering new areas. This comprehensive glossary provides clear, concise definitions of essential investment terms covering private markets, public markets, regulatory concepts, and financial instruments. Use this as a reference guide to better understand investment documents, discussions, and opportunities across various asset classes.
General Investment Terms
Accredited Investor
An individual or entity that meets specific financial criteria set by the SEC, allowing them to invest in private placements and other restricted securities offerings.
Asset Class
A category of investments with similar characteristics and behavior, such as stocks, bonds, real estate, or alternative investments.
Due Diligence
The comprehensive research and analysis process investors conduct before making an investment decision, including review of financials, management, market, and risks.
Liquidity
The ease with which an investment can be converted to cash without significantly affecting its market price.
Portfolio
A collection of investments held by an individual or institution, typically diversified across different asset classes and securities.
Private Market Terms
Key Private Market Concepts
Private Placement
A securities offering sold directly to a select group of investors rather than through a public offering.
Private Equity
Investment in private companies or buyouts of public companies, typically involving significant ownership stakes and active management.
Venture Capital
Investment in early-stage, high-growth potential companies in exchange for equity ownership.
Carried Interest
The share of profits that general partners in private equity or venture capital funds receive, typically 20% of fund profits.
Dry Powder
Uninvested committed capital available to private equity or venture capital funds for new investments.
IRR (Internal Rate of Return)
The annualized rate of return on an investment, commonly used to measure private equity and venture capital performance.
LBO (Leveraged Buyout)
The acquisition of a company using a significant amount of borrowed money to meet the cost of acquisition.
SPAC and Public Market Terms
SPAC (Special Purpose Acquisition Company)
A publicly traded company formed specifically to raise capital through an IPO for the purpose of acquiring or merging with an existing company.
De-SPAC
The process by which a SPAC completes its business combination with a target company, taking the target public.
PIPE (Private Investment in Public Equity)
A private placement of shares in a publicly traded company, often used to provide additional capital during SPAC mergers.
Redemption Rights
The right of SPAC public shareholders to redeem their shares for cash if they don't approve of the proposed business combination.
Warrant
A derivative security that gives holders the right to purchase shares at a specific price within a certain time frame.
Regulatory and Legal Terms
SEC Regulations
Regulation D
SEC regulation providing exemptions from registration requirements for private placement offerings.
Regulation A
SEC regulation allowing companies to raise up to $75 million from both accredited and non-accredited investors with reduced disclosure requirements.
Regulation CF
SEC regulation enabling companies to raise capital through crowdfunding platforms from a broad investor base.
Blue Sky Laws
State-level securities regulations designed to protect investors from fraudulent investment schemes.
Form D
A filing with the SEC required for most Regulation D private placement offerings, providing notice of the securities sale.
Qualified Purchaser
An individual or entity with investable assets exceeding $5 million, qualifying for investment in certain hedge funds and private funds.
Safe Harbor
Legal provisions that reduce or eliminate liability under certain circumstances, often found in securities regulations.
Fund Structure Terms
General Partner (GP)
The entity that manages a private equity or venture capital fund and makes investment decisions.
Limited Partner (LP)
Investors in a private equity or venture capital fund who provide capital but have limited involvement in management decisions.
Management Fee
The annual fee paid to fund managers, typically 2% of committed capital or assets under management.
Hurdle Rate
The minimum rate of return a fund must achieve before the general partner can receive carried interest.
Clawback
A provision requiring general partners to return previously received carried interest if the fund's overall performance falls below specified thresholds.
Valuation and Financial Terms
Key Valuation Concepts
Pre-Money Valuation
The value of a company before receiving new investment capital.
Post-Money Valuation
The value of a company after receiving new investment capital (pre-money valuation plus investment amount).
Enterprise Value
The total value of a company, including equity value plus debt minus cash.
Multiple of Invested Capital (MOIC)
A measure of investment returns showing how many times the original investment has been returned.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization - a measure of a company's operating performance.
Cap Table
A table showing the ownership structure of a company, including shares, options, and investor stakes.
Dilution
The reduction in existing shareholders' ownership percentage when new shares are issued.
Investment Process Terms
Term Sheet
A non-binding document outlining the key terms and conditions of a potential investment.
Lead Investor
The primary investor in a funding round who takes responsibility for setting terms and coordinating other investors.
Pro Rata Rights
The right of existing investors to maintain their ownership percentage by participating in future funding rounds.
Anti-Dilution Provisions
Contractual rights protecting investors from dilution in future financing rounds at lower valuations.
Liquidation Preference
The order and amount that investors receive proceeds when a company is sold or liquidated.
Exit and Liquidity Terms
Exit Strategies
IPO (Initial Public Offering)
The first sale of shares to the public by a private company, creating public market liquidity.
Strategic Acquisition
The purchase of a company by another company for strategic reasons rather than financial returns.
Secondary Sale
The sale of private company shares to other investors before a liquidity event.
Lock-Up Period
A contractual restriction preventing shareholders from selling their shares for a specified time period.
Drag-Along Rights
Rights allowing majority shareholders to force minority shareholders to participate in a sale of the company.
Tag-Along Rights
Rights allowing minority shareholders to participate in a sale initiated by majority shareholders.
Waterfall Distribution
The order in which proceeds from an investment are distributed among different classes of investors.
Risk and Performance Terms
Alpha
A measure of investment performance relative to a market benchmark, representing excess return above the benchmark.
Beta
A measure of an investment's sensitivity to market movements, with 1.0 indicating movement in line with the market.
Sharpe Ratio
A measure of risk-adjusted return, calculated as excess return over the risk-free rate divided by standard deviation.
Downside Protection
Investment features or strategies designed to limit losses during market downturns.
Volatility
The degree of variation in an investment's returns over time, often measured as standard deviation.
Conclusion
This glossary provides a foundation for understanding investment terminology across various asset classes and market segments. Investment language continues to evolve as new products, regulations, and market structures emerge, so staying informed about terminology is important for all market participants.
Use this reference guide when reviewing investment documents, participating in discussions, or conducting due diligence on investment opportunities. Understanding these terms will help you communicate more effectively with investment professionals and make more informed decisions about your investment portfolio.
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