Below are definitions for commonly used language you will find on this website and within the investment industry. We hope you find this investment glossary helpful on your journey to becoming knowledgeable on impact investing and socially responsible portfolios.
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.
An alternative investment is an investment in asset classes other than stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, carbon credits, venture capital, film production, financial derivatives, and cryptocurrencies. Investments in real estate and forestry are also often termed alternative despite the ancient use of such real assets to enhance and preserve wealth. In the last century, fancy color diamonds have emerged as an alternative investment class as well. Alternative investments are to be contrasted with traditional investments.
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.
The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the second market.
A capital gain refers to profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price.
Corporate governance is the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs. Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are affected by attempts to align the interests of stakeholders. Interest in the corporate governance practices of modern corporations, particularly in relation to accountability, increased following the high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud; and then again after the recent financial crisis in 2008.
A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies.
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to reinvest the profit in the business (called retained earnings) and pay a proportion of the profit as a dividend to shareholders. Distribution to shareholders may be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase.
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE
Environmental, social and governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business.
Environmental protection is a practice of protecting the natural environment on individual, organisation controlled or governmental levels, for the benefit of both the environment and humans. Due to the pressures of overconsumption , population and technology, the biophysical environment is being degraded, sometimes permanently. This has been recognized, and governments have begun placing restraints on activities that cause environmental degradation. Since the 1960s, activity of environmental movements has created awareness of the various environmental problems.
Human rights are moral principles or norms that describe certain standards of human behaviour, and are regularly protected as legal rights in municipal and international law. They are commonly understood as inalienable fundamental rights “to which a person is inherently entitled simply because she or he is a human being,” and which are “inherent in all human beings” regardless of their nation, location, language, religion, ethnic origin or any other status. They are applicable everywhere and at every time in the sense of being universal, and they are egalitarian in the sense of being the same for everyone. They are regarded as requiring empathy and the rule of law and imposing an obligation on persons to respect the human rights of others, and it is generally considered that they should not be taken away except as a result of due process based on specific circumstances; for example, human rights may include freedom from unlawful imprisonment, torture and execution.
INDIVIDUAL RETIREMENT ACCOUNT (IRA)
An individual retirement account or IRA is a form of “individual retirement plan”, provided by many financial institutions, that provides tax advantages for retirement savings in the United States. An individual retirement account is a type of “individual retirement arrangement” as described in IRS Publication 590, individual retirement arrangements (IRAs). The term IRA, used to describe both individual retirement accounts and the broader category of individual retirement arrangements, encompasses an individual retirement account; a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries; and an individual retirement annuity, by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.
Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (i.e. the amount borrowed). It is distinct from a fee which the borrower may pay the lender or some third party.
A financial advisor is a professional who suggests and renders financial services to clients based on their financial situation. In many countries Financial Advisors have to complete specific training and hold a license to provide advices. In the United States for example a financial advisor carries a Series 65 or 66 license and according to the U.S. Financial Industry Regulatory Authority (FINRA), license designations and compliance issues must be reported for public view. FINRA describes the main groups of investment professionals who may use the term financial adviser to be: brokers, investment advisers, accountants, lawyers, insurance agents and financial planners.
A concurrent estate or co-tenancy is a concept in property law which describes the various ways in which property is owned by more than one person at a time. If more than one person owns the same property, they are referred to as co-owners. If more than one person leases the same property, they are called co-tenants or joint tenants. Most common law jurisdictions recognize tenancies in common and joint tenancies, and some also recognize tenancies by the entirety. Many jurisdictions refer to a joint tenancy as a joint tenancy with right of survivorship, and a few U.S. states treat the phrase joint tenancy as synonymous with a tenancy in common.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The primary advantages of mutual funds are that they provide a higher level of diversification, they provide liquidity, and they are managed by professional investors.
Under the United States Internal Revenue Code, the type of income is defined by its character. Ordinary income is usually characterized as income other than (long-term) capital gain. Ordinary income can consist of income from wages, salaries, tips, commissions, bonuses, and other types of compensation from employment, interest, dividends, or net income from a sole proprietorship, partnership or LLC. Rents and royalties, after certain deductions, depreciation or depletion allowances, and gambling winnings are also treated as ordinary income. A “short term capital gain”, or gain on the sale of an asset held for less than one year of the capital gains holding period, is taxed as ordinary income.
Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.
The U.S. Internal Revenue Service categorizes income into three broad types, active income, passive income, and portfolio income. It defines passive income as only coming from two sources: rental activity or “trade or business activities in which you do not materially participate.” Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing. Passive income is usually taxable.
In finance, private equity is a type of equity and one of the asset classes consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange.
A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor. Each of these categories of investors has its own set of goals, preferences and investment strategies; however, all provide working capital to a target company to nurture expansion, new-product development, or restructuring of the company’s operations, management, or ownership.
ROTH INDIVIDUAL RETIREMENT ACCOUNT (ROTH IRA)
A Roth IRA (individual retirement account) is a retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of savings for retirement. The Roth IRA’s principal difference from most other tax-advantaged retirement plans is rather than granting a tax reduction for money placed into the retirement plan, the money withdrawn from the Roth IRA plan during retirement is not taxed, with some restrictions.
SOCIALLY RESPONSIBLE INVESTING (SRI)
Socially responsible investing (SRI), or social investment, also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social good to bring about a social change.
The stock (also capital stock) of a corporation is constituted of the equity stock of its owners. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. In liquidation, the stock represents the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt. Stockholders’ equity cannot be withdrawn from the company in a way that is intended to be detrimental to the company’s creditors.
Tobacco control is a field of international public health science, policy and practice dedicated to addressing tobacco use and thereby reducing the morbidity and mortality it causes. Tobacco control is a priority area for the World Health Organization (WHO), through the Framework Convention on Tobacco Control.
UNIFORM TRANSFERS TO MINORS ACT (UTMA)
The Uniform Transfers To Minors Act (UTMA) is a uniform act drafted and recommended by the National Conference of Commissioners on Uniform State Laws in 1986, and subsequently enacted by most U.S. States, which provides a mechanism under which gifts can be made to a minor without requiring the presence of an appointed guardian for the minor, and which satisfies the Internal Revenue Service requirements for qualifying a gift of up to $14,000 (2017) for exclusion from the gift tax. It is a more flexible extension of the Uniform Gifts to Minors Act (UGMA), and allows the gifts to be real estate, inheritances, and other property.
Venture capital (VC) is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both). Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. The start-ups are usually based on an innovative technology or business model and they are usually from the high technology industries, such as information technology (IT), clean technology or biotechnology.
Other Investment Glossary Terms
Thought of a word that belongs in our investment glossary? Reach out to us by any of the means below and send us your thoughts. Please help us keep this investment glossary up-to-date.