Sheridan
Content Writer
September 3, 2020

Finance jargon buster

Time to unearth the high school economics definitions many of us suppressed, or perhaps never learnt. 

After announcing our biggest crowdfund yet, we thought we’d help you out with a few need-to-know definitions if you’re new to the world of investing. 

We’ve consolidated a list of popular investment related terms you may have encountered, perhaps with a look of confusion, and have done our best to explain them in a digestible way.

Capital

Because the English language loves a homonym, even if you have a basic understanding of financial lingo, you’ll know capital doesn’t only refer to the use of the alphabet or the government centre of a country. 

Capital is a term for financial assets, such as money stored in your deposit account.

While it commonly takes for as money, it is also considered "goods that are used in further production of wealth".

Capital at risk

You may have seen this line lurking around investment-related collateral.

Capital risk is the potential of loss of part, or all of an investment. It is applied to anything you may have invested in that isn’t subject to a guarantee of full return of original capital.

At Chip we believe that investing should be for everyone. But equity investing is not without its risks.  

Investing in this convertible or investing in any start-up is high risk. It’s not the same as having your money in a savings account.

Your investment could be locked in for a long time, as you don’t get a return until we exit (i.e. we’re bought, or go to market in an IPO). So don’t invest any money that you might need suddenly in an emergency.

Most importantly your capital is at risk when you invest, and remember, past performance is not a reliable guide to future performance. 

Convertible loan note

A convertible loan involves debt that is eventually converted into equity at the next funding round.

Convertibles get their name simply because the investment converts to shares at a later date, referred to as a ‘conversion point’, which in our case will be our next equity funding round.

Since the money you invest isn’t converted into equity right away, you’ll get the shares at a lower price when compared to the next rounds as compensation.

Meaning, when the money you invest is eventually converted to equity, at this ‘conversion point’, you’ll get your shares at a discounted price - woo! 

Crowdcube

Crowdcube is an online platform that allows entrepreneurs to crowdsource money to kickstart their business, as well as making equity investment accessible to everyone.

They have helped fund the likes of Revolut, Monzo, Camden Town Brewery and most importantly, us!

Learn more about Crowdcube by visiting their website here.

Crowdfunding

Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. 

Dilution

Dilution occurs when a company issues new shares, leading to decrease of an existing shareholder's ownership percentage of that company.

Imagine a company as a pie. I’m feeling apple pie. 

At the start, the founder owns the whole pie. It’s a small pie, but it’s all theirs. Then, they get some investment, so the pie grows larger. 

But the investor takes a slice (i.e. equity) of the now larger pie. The founder does not own the whole pie anymore, but their slice of the enlarged pie is larger than the initial pie was. With each new investment, each chunk of equity represents a smaller chunk of the total equity. This is called dilution. 

Equity

Equity is typically referred to as shareholder equity, which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off.

Making an equity investment is a commitment.

Unlike buying shares in a public company, which you can trade any time, buying a stake in a startup means you don’t get your money back until the company ‘exits’.

Investments

An investment is an asset or item you purchase in the hope that it will generate future wealth. 

Say you were to invest in Chip (thanks!), you wouldn’t turn over profit until you sold your shares on the stock market.

The appeal is that by putting a sum of money into a company, in the long term you might be able to make a profit that will pay back your initial investment and then some. 

See capital at risk above. 

Liquidity

Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.

Cash is the most liquid of assets while tangible items (real estate, fine art, lego) are less liquid and the two main types of liquidity include market liquidity and accounting liquidity.

Share

A share is simply a divided-up unit of the total value of a company.

For example, if a company is worth £100 million, and there are 50 million shares, each share is worth £2.

Those shares can, and do, go up and down in value for various reasons.

When investing, a companywide issue shares to raise money, often companies will offer investors with the highest amount of shares more of an exclusive insight into decision making processes and roadmaps of the company's future. 

VC

Venture capitalists (VC) are professional investors that invest capital in startups and high growth companies.

In exchange for their investment they own part of that company, so that when the company mature, they make a return on their investment.

Want to know how you can become a Chip investor?

Join our 11,000+ investors and come along for the journey as we build the best savings app in the world.

Click here to pre-register.

Once again, capital at risk.

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