Glossary of Investment Terms

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.

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.

General Investment Terms

Accredited Investor

Asset Class

Due Diligence

Liquidity

Portfolio

Private Market Terms

Key Private Market Concepts

Private Placement

Private Equity

Venture Capital

Carried Interest

Dry Powder

IRR (Internal Rate of Return)

LBO (Leveraged Buyout)

SPAC and Public Market Terms

SPAC (Special Purpose Acquisition Company)

De-SPAC

PIPE (Private Investment in Public Equity)

Redemption Rights

Warrant

Regulatory and Legal Terms

SEC Regulations

Regulation D

Regulation A

Regulation CF

Blue Sky Laws

Form D

Qualified Purchaser

Safe Harbor

Fund Structure Terms

General Partner (GP)

Limited Partner (LP)

Management Fee

Hurdle Rate

Clawback

Valuation and Financial Terms

Key Valuation Concepts

Pre-Money Valuation

Post-Money Valuation

Enterprise Value

Multiple of Invested Capital (MOIC)

EBITDA

Cap Table

Dilution

Investment Process Terms

Term Sheet

Lead Investor

Pro Rata Rights

Anti-Dilution Provisions

Liquidation Preference

Exit and Liquidity Terms

Exit Strategies

IPO (Initial Public Offering)

Strategic Acquisition

Secondary Sale

Lock-Up Period

Drag-Along Rights

Tag-Along Rights

Waterfall Distribution

Risk and Performance Terms

Alpha

Beta

Sharpe Ratio

Downside Protection

Volatility

Conclusion

Related Articles

Beginner's Guide to Alternative Investments

How to Evaluate an Investment Opportunity

Private Placements Explained

What is a SPAC?

General Investment Terms

Accredited Investor

Asset Class

Due Diligence

Liquidity

Portfolio

Private Market Terms

Key Private Market Concepts