Investing can often seem daunting, especially when confronted with a variety of technical terms and concepts. Understanding this terminology is essential for making informed financial decisions and navigating the complexities of markets with confidence.
This glossary serves as a comprehensive reference, offering clear and concise definitions of key investment terms. Whether you are a novice investor seeking to build your knowledge or an experienced professional refining your expertise, this resource is designed to provide the clarity and insight needed to achieve your financial goals.
Investment Terms
Accredited Investor: Investors who meet certain financial criteria set by the SEC to limit risk. They must have a net worth exceeding $1 million (excluding their home) or an annual income over $200,000 ($300,000 jointly with a spouse) for the past two years.
Alternative Investments/Assets: Non-traditional investments outside the typical categories like stocks and bonds. Examples include private equity, hedge funds, real estate, commodities, and tangible assets like art or jewelry.
Angel Investing: This involves accredited investors providing early-stage funding for startups in exchange for equity or convertible notes. Crowdfunding platforms also offer angel investment opportunities.
Angel Investing Community: A group where investors evaluate early-stage opportunities together, sharing leads and learning about investments.
Assets Under Management (AUM): The total market value of all investments a financial institution, fund, or individual manages on behalf of clients.
Bootstrapping: Building or funding a company using personal funds or the revenue generated by the business.
Carried Interest (Carry): A share of a fund’s investment profits paid to fund managers as compensation. Commonly used in private equity and venture capital funds.
Convertible Note: A loan provided to startups that converts into equity at a predetermined milestone, postponing the valuation until later.
Crowdfunding: Raising money for startups or projects via platforms that accept smaller investments from many individuals.
Due Diligence: A thorough investigation conducted by investors or funds to assess a company’s viability, including founders, assets, liabilities, and market potential.
Dry Powder: Capital that has been committed but not yet invested in specific ventures.
Equity: Ownership shares in a startup. The equity’s value depends on the startup’s most recent valuation and determines an investor’s return during an exit.
Exit: The point where investors earn a return, either through a company’s acquisition or IPO (Initial Public Offering). This often takes 7–10 years for venture investments.
Fiduciary: Financial advisors legally obligated to act in their clients’ best interests.
Fiduciary Responsibility: A fiduciary’s ethical or legal duty to manage investments aligned with a client’s best interests.
Follow-on Investment: An additional investment made by an existing investor after a startup’s initial funding round, often seen as doubling down on a promising company.
Fund: A pool of money managed by fund managers for a specific investment purpose.
Hedge Fund: Actively managed pools of investments using strategies to beat average returns. Hedge funds often involve riskier investments, such as derivatives.
Mutual Fund: A collective investment vehicle pooling money to buy stocks, bonds, and other assets. Managed by professionals who handle investment decisions.
Private Equity: Long-term investments in assets not publicly traded, often requiring 10+ years to realize returns. Startups may exit by being acquired by private equity firms.
Venture Fund: A fund specifically designed to invest in scalable startups or privately held companies.
Fund Partners: Managers or investors of a fund.
General Partner (GP): Fund managers who raise and manage the fund, making investments aligned with the fund’s strategy.
Limited Partner (LP): An investor in a hedge fund, private equity fund, or venture fund. LPs rely on GPs for investment decisions.
Fund Strategy & Thesis: The investing framework for a venture fund, often focusing on a particular market or priority, such as climate change or women’s healthcare.
Investment Rounds: The stages of startup fundraising:
- Friends & Family Round: Initial investments often from close relations.
- Pre-seed: Funding at a business’s inception.
- Seed: The first major round typically led by angel investors or venture funds.
- Series A: Early-stage funding led by venture funds.
- Series B, C, D, etc.: Larger investments for scaling startups.
Net Operating Income (NOI): The profitability of an investment, calculated by subtracting operating expenses from revenue.
OPEX (Operating Expenses): Costs incurred during the production of goods or services, including materials, labor, and machinery.
Privately Held Company: A company whose shares are not traded on public markets.
Return on Investment (ROI): The net gain or loss of an investment after accounting for fees, expenses, and the original investment.
Rolling Fund: A fund that allows quarterly fundraising without a specified close date.
Scalable Startup: A privately held company designed to grow rapidly, providing significant returns to investors at exit.
Special Purpose Vehicle (SPV): A single-purpose fund raised to invest in only one company.
Stock Market: Exchanges where companies sell shares to the public, such as the NYSE and NASDAQ.
Term Sheet: A nonbinding document outlining the key terms of an investment agreement, often including the company valuation.
Total Addressable Market (TAM): The total market demand a business can potentially capture with its product or service.
Valuation: The assessed value of a company, typically determined by the most recent investor term sheet.
Valuation Cap: A predefined maximum company value for calculating equity in convertible note agreements.
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