Credit Crisis

What Does Credit Crisis Mean?

A crisis that occurs when several financial institutions issue or are sold high-risk loans that start to default.
As borrowers default on their loans, the financial institutions that issued the loans stop receiving
payments. This is followed by a period in which financial institutions redefine the riskiness of borrowers,
making it difficult for debtors to find creditors.

Investopedia explains Credit Crisis

In the case of a credit crisis, banks either do not charge enough interest on loans or pay too much for the
securitized loan, or the rating system does not rate the risk of the loans correctly. A crisis occurs when
several factors combine in the marketplace, affecting a large number of investors. 

For example, banks will charge teaser rates on loans, but when the initial low payments change, they
become too high for borrowers to pay. The borrowers default on the loans, and the loan's collateral value
simultaneously drops. If enough lending institutions reduce the number of new loans issued, the economy
will slow down, making it even harder for other borrowers to pay their loans. 
Unitary Thrift

What Does Unitary Thrift Mean?

A company that controls a single savings-and-loan association. Unitary thrifts resemble bank holding
companies in some respects, but their financial powers are broader in scope. They are authorized to
engage in any type of industrial or commercial business.

Investopedia explains Unitary Thrift

Unitary thrifts are allowed to open branches anywhere in the U.S. They can also allocate up to 20% of
their assets to commercial loans. Because they are still thrift institutions, they must hold at least 65% of
their assets in qualified thrift investments, such as residential mortgages or mortgage-backed securities.
Price Skimming

What Does Price Skimming Mean?

A product pricing strategy by which a firm charges the highest initial price that customers will pay. As the
demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive
segment. 

Therefore, the skimming strategy gets its name from skimming successive layers of "cream," or customer
segments, as prices are lowered over time.

Investopedia explains Price Skimming

Firms often use this technique to recover the cost of development. 

Skimming is a useful strategy when:

-There are enough prospective customers willing to buy the product at the high price.
-The high price does not attract competitors.
-Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs.
-The high price is interpreted as a sign of high quality.
Holding Company

What Does Holding Company Mean?

A parent corporation that owns enough voting stock in another corporation to control its board of directors
(and, therefore, controls its policies and management).

Investopedia explains Holding Company

A holding company must own at least 80% of voting stock to get tax consolidation benefits, such as tax-
free dividends.
Commercial Loan

What Does Commercial Loan Mean?

A debt-based funding arrangement that a business can set up with a financial institution. The proceeds
of commercial loans may be used to fund large capital expenditures and/or operations that a business
may otherwise be unable to afford.

Investopedia explains Commercial Loan

Due to expensive upfront costs and regulation related hurdles, smaller businesses do not typically have
direct access to the debt and equity markets for financing purposes. Therefore,  they must rely on
financial institutions to meet their financing needs.

Similar to consumer credit, businesses have a variety of lending products to choose from. A line of credit,
term loans and unsecured loans are just a few examples. However, small businesses should shop around
at different institutions to determine which lender offers the best terms for the loan.
deral Savings and Loan

What Does Federal Savings and Loan Mean?

A federally chartered savings and loan is a banking institution that functions in a very similar fashion to
retail banks and credit unions, with some slight limitations on the type of services it can offer. Historically,
the primary purpose of savings and loan associations was to allow members to deposit savings and
borrow money at rates that were slightly more competitive than commercial banks. The competitive
difference in interest and loan rates came from the fact that a savings and loan was "mutually owned" by
its members, with no need to pass profits on to a third party.

Investopedia explains Federal Savings and Loan

Federal savings and loan associations reached their heyday in the mid-1980s after being deregulated just
a few years earlier. However, in response to the scandalous failure of a number of prominent S&Ls,
including Charles Keating's Lincoln Savings and Loan, participation in savings and loans begain to
dwindle by the early 1990s. In reaction to the growing insolvency of the savings and loan industry, the
government reestablished stronger oversight and created the Office of Thrift Supervision in 1989. This
regulatory body, itself a division of the Treasury Department, helps to ensure the safety and stability of
member savings and loans. As part of the act that created this agency, savings and loan deposits came
under the protection of the FDIC insurance and remain so today.
Financial Cooperative

What Does Financial Cooperative Mean?

A financial institution that is owned and operated by its members. The goal of a financial cooperative is to
act on behalf of a unified group as a traditional banking service. These institutions attempt to differentiate
themselves by offering above-average service along with competitive rates in the areas of insurance,
lending and investment dealings.

Investopedia explains Financial Cooperative

Credit unions are the most popular form of financial cooperative because they are owned and operated by
their members. These financial institutions often pay higher-than-average interest rates and are only
accessible to those that have accounts.  

The size of financial cooperatives can vary from only a handful of branches to being widespread with
thousands of locations. Many financial cooperatives offer products and services that are comparable to
those offered by the major diversified banks.
Mortgage-Backed Security (MBS)

What Does Mortgage-Backed Security (MBS) Mean?

A type of asset-backed security that is secured by a mortgage or collection of mortgages. These
securities must also be grouped in one of the top two ratings as determined by a accredited credit rating
agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the
mortgage must have originated from a regulated and authorized financial institution.

Also known as a "mortgage-related security" or a "mortgage pass through".

Investopedia explains Mortgage-Backed Security (MBS)

When you invest in a mortgage-backed security you are essentially lending money to a home buyer or
business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having
to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a
middleman between the home buyer and the investment markets. 

This type of security is also commonly used to redirect the interest and principal payments from the pool
of mortgages to shareholders. These payments can be further broken down into different classes of
securities, depending on the riskiness of different mortgages as they are classified under the MBS.
Thrift Bank

What Does Thrift Bank Mean?

A financial institution focusing on taking deposits and originating home mortgages. Thrift banks often have
access to low-cost funding from Federal Home Loan Banks, which allows for higher savings account
yields to customers and increased liquidity for mortgage loans.  

Also known as "savings and loan associations".

Investopedia explains Thrift Bank

Thrift Banks tend to be community-focused, and smaller than retail and commercial banks. While the
main lines of business continue to be loan origination and savings deposits, many thrifts offer checking
accounts and other basic banking services. The thrift banking system was created in an attempt to
transition mortgage loan origination away from insurance companies and into banking institutions, as
early mortgages were often set up as interest-only loans that often couldn't be repaid when balloon
payments came due.
Branch Banking

What Does Branch Banking Mean?

Engaging in banking activities such as accepting deposits or making loans at facilities away from a bank's
home office. Branch banking has gone through significant changes since the 1980s in response to a more
competitive nationwide financial services market. Financial innovation such as internet banking will greatly
influence the future of branch banking by potentially reducing the need to maintain extensive branch
networks to service consumers.

Investopedia explains Branch Banking

The Riegle-Neal Interstate Banking & Branching Efficiency Act of 1994 authorized well-capitalized banks
to acquire branch offices, or open new ones, anywhere in the United States outside their home states
after June 1, 1997. Most states passed laws enabling interstate branching prior to that date. Branch
banking networks are gradually evolving into multistate financial services networks where depositors can
access their accounts from any banking office.
Community Development Financial Institution - CDFI

What Does Community Development Financial Institution - CDFI Mean?

A private sector financial institution that focuses on personal lending and business development efforts in
local communities. CDFIs can receive federal funding through the U.S. Department of the Treasury by
completing an application. They can also receive funding from private sector sources such as individuals,
corporations and religious institutions.

Investopedia explains Community Development Financial Institution - CDFI

CDFIs focus on serving the needs of the poor and working class within urban and poor rural communities,
as many of these citizens are underserved or ignored by traditional commercial banks and lending
processes. The goal is to help these people to become financially self-sufficient, allowing them
to increase their contributions to national economic growth and to rebuild run-down communities.  

There are hundreds of chartered CDFIs operating in the United States, each with the goal of fostering
economic growth within the local community through innovative (and often less stringent) lending
practices, educational efforts and small business lending.  

CDFIs can be considered a form of microfinance. They measure their progress not only by dollars earned
but also by how the community is growing economically. There are several different structures aCDFIcan
take, including community development banks, community development loan funds, microenterprise
funds and venture funds.CDFIs tend to be controlled locally, without interference from the federal
government or national corporate hierarchy.  
Microenterprise

What Does Microenterprise Mean?
A small business that employs a small number of employees. A microenterprise will usually operate
with fewer than 10 people and is started with a small amount of capital. Most microenterprises specialize
in providing goods or services for their local areas.

Investopedia explains Microenterprise
Microenterprises serve a vital purpose in improving the quality of life for people in developing countries.
Microfinance seeks to help microenterprises by loaning small amounts of capital to these businesses.
This allows poor individuals or families to start their own businesses, earn income and benefit their
communities. 

For example, a woman in a developing country may use microcredit to take out a loan and purchase
a sewing machine. She could use the machine to establish a microenterprise that specializes in tailoring.
The woman would increase her wealth and help her community by providing a service.
Microinsurance

What Does Microinsurance Mean?
Insurance products that offer coverage to low-income households. A microinsurance plan provides
protection to individuals who have little savings and is tailored specifically for lower valued assets and
compensation for illness, injury or death.

Investopedia explains Microinsurance
As a division of microfinance, microinsurance looks to aid poor families by offering insurance plans
tailored to their needs. Microinsurance is often found in developing countries, where the current insurance
markets are inefficient or non-existent. Because the coverage value is lower than a usual insurance plan,
the insured people pay considerably smaller premiums.
Microfinance

What Does Microfinance Mean?
A type of banking service that is provided to unemployed or low-income individuals or groups who would
otherwise have no other means of gaining financial services. Ultimately, the goal of microfinance is to give
low income people an opportunity to become self-sufficient by providing a means of saving money,
borrowing money and insurance.
Investopedia explains Microfinance
Microfinancing is not a new concept. Small microcredit operations have existed since the mid 1700s.
Although most modern microfinance institutions operate in developing countries, the rate of payment
default for loans is surprisingly low - more than 90% of loans are repaid. 

Like conventional banking operations, microfinance institutions must charge their lenders interests on

loans. While these interest rates are generally lower than those offered by normal banks, some
opponents of this concept condemn microfinance operations for making profits off of the poor.

The World Bank estimates that there are more than 500 million people who have directly or indirectly
benefited from microfinance-related operations.  
Microsavings

What Does Microsavings Mean?
A branch of microfinance, consisting of a small deposit account offered to lower income families or
individuals as an incentive to store funds for future use. Microsavings accounts work similar to a normal
savings account, however, are designed around smaller amounts of money. The minimum balance
requirements are often waived, or very low, allowing users to save small amounts of money and not be
charged for the service.

Investopedia explains Microsavings
Microsavings plans are usually offered in developing countries as a way to encourage saving for
education or other future investment. People who invest in these plans are better prepared to cope with
any unforeseen expenses, which would usually harm lower income individuals
Microcredit

What Does Microcredit Mean?
An extremely small loan given to impoverished people to help them become self employed.  

Also known as "microlending" or "microloan". 

Investopedia explains Microcredit
Renee Loth wrote an article in 2002 for the Boston Globe entitled "Women Entrepreneurs,"
which explores how this type of loan possibly originated. In the article Loth suggests the system started in
Bangladesh in 1976, when an economics professor loaned a group of women $27 to finance their own
small business. Amazingly the women repaid the loan and were able to sustain the business. 
Socially Responsible Investment - SRI

What Does Socially Responsible Investment - SRI Mean?

An investment that is considered socially responsible because of the nature of the business the
company conducts. Common themes for socially responsible investments include avoiding investment in
companies that produce or sell addictive substances (like alcohol, gambling and tobacco) and seeking out
companies engaged in environmental sustainability and alternative energy/clean technology efforts.
Socially responsible investments can be made in individual companies or through a socially conscious
mutual fund or exchange-traded fund (ETF).  

Investopedia explains Socially Responsible Investment - SRI

"Socially conscious" investing is growing into a widely-followed practice, as there are dozens of new funds
and pooled investment vehicles available for retail investors. Mutual funds and ETFs provide an added
advantage in that investors can gain exposure to multiple companies across many sectors with a single
investment. Investors should read carefully through fund prospectuses to determine the exact
philosophies being employed by fund managers.  

Just because an investment touts itself as socially responsible doesn't mean that it will provide investors
with a good return.
Ethical Investing

What Does Ethical Investing Mean?

Using one's ethical principles as the main filter for securities selection. Ethical investing depends on an
investor's views; some may choose to eliminate certain industries entirely (such as gambling, alcohol, or
firearms) or to over-allocate to industries that meet the individual's ethical guidelines.  

Ethical investing is sometimes used interchangeably with socially conscious investing, but socially
conscious funds typically have one overarching set of guidelines that is used to select the portfolio,
whereas ethical investing brings about a more personalized result.  

Investopedia explains Ethical Investing

Ethical investing gives individuals the power to allocate capital toward companies that are in line with their
personal views, whether they are based on environmental, religious or political precepts. Investors should
keep in mind that "ethical" does not imply "outperform".

A good way to start with an ethical investing policy is to write down the areas you want to avoid as well as
where you want to see your money invested. From there you can come up with an asset allocation plan
and begin researching individual securities and funds.
Fair Trade Investing

What Does Fair Trade Investing Mean?

Investing in companies or projects that promote fair trade with producers in developing nations. Basic fair
trade philosophies call for equal pay for suppliers of raw goods and materials as well as respect for strong
environmental practices and a focus on the trading relationships between advanced economies and
developing nations.  
Investopedia explains Fair Trade Investing
Fair trade investing mainly deals with trade in agricultural products, such as coffee, sugar and textiles.
Many of the growers of these products are low-income workers who are often marginalized in trade
agreements and receive few subsidies from their home governments. Fair trade practices aim to help
these workers gain a higher standard of living and financial independence, while the companies who
actively promote fair trade can show transparency in their business dealings and gain valuable image
points with shareholders.  
Green Economics

What Does Green Economics Mean?

A methodology of economics that supports the harmonious interaction between humans and nature and
attempts to meet the needs of both simultaneously. The green economic theories encompass a wide
range of ideas all dealing with the interconnected relationship between people and the environment.
Green economists assert that the basis for all economic decisions should be in some way tied to the
ecosystem.

Investopedia explains Green Economics

Green economists perceive nature as being extremely valuable and seek to maintain it. Supporters of this
branch of economics are concerned with the environment and believe that actions should be taken to
protect nature and encourage the positive co-existence of both humans and nature. Emphasis is placed
on creating value through quality rather than on accumulating material items and money.
Green Fund

What Does Green Fund Mean?

A mutual fund or other investment vehicle that will only invest in companies that are deemed socially
conscious in their business dealings or directly promote environmental responsibility. A green fund can
come in the form of a focused investment vehicle for companies engaged in environmentally supportive
businesses, such as alternative energy, green transport, water and waste management, and sustainable
living.

Investopedia explains Green Fund

A green fund's strategy can be based on avoiding negative company criteria (businesses such as guns,
alcohol, gambling, pornography, animal testing, etc.), choosing positive company criteria (environmental
programs, energy conservation, fair trade, etc.), or a combination of both strategies. 

Based on performance, it is not yet clear whether green funds and socially responsible investing can
consistently create better returns for investors. But they do represent a proactive step toward
environmental consciousness, which many investors appreciate. 

Socially conscious investing is on the rise, which is due largely to increased worldwide exposure to the
issue, as well as increased federal funding for alternative energy and other programs.
Marginal Social Cost - MSC
What Does Marginal Social Cost - MSC Mean?
The total cost to society as a whole for producing one further unit, or taking one further action, in an
economy. This total cost of producing one extra unit of something is not simply the direct cost borne by
the producer, but also must include the costs to the external environment and other stakeholders.

Calculated as:

Where:
MSC =  Marginal Social Cost 
MPC = Marginal Private Cost  
MEC = Marginal External Cost   

Investopedia explains Marginal Social Cost - MSC

For example, take the case of a coal plant polluting a local river. If the coal plant's marginal social costs
are more than its marginal private costs, the MEC must therefore be negative. The cost of the produced
energy is more than just the rate charged by the company, as society must bear the costs of a polluted
river and the effects of that action.  

While marginal social cost represents a powerful economic principle, it can rarely be expressed in
tangible dollars. We know that there are costs incurred by certain acts of production, although their far-
reaching effects make them difficult to quantify. The theory helps legislators and economists come up with
a framework to "incentivize" companies to reduce the marginal social costs of their actions. 
Protest Divestment

What Does Protest Divestment Mean?

The intentional selling of stock or other assets on a large scale to create financial pressure on a
corporation or government to force social change. Protest divestment is a form of shareholder activism.

Investopedia explains Protest Divestment

For example, in the late 1980s, students at many American universities lobbied their schools' endowment
funds to stop investing in South Africa. Their end goal was to force South Africa's government to end
apartheid. The attention this raised forced many corporations to follow suit, and by 1990 more than
200 U.S. companies had cut ties with the country, resulting in the direct loss of $1 billion of investment.

The attention the protest garnered put the issue of apartheid in the national spotlight and Congress
passed a series of economic sanctions as a result. This economic pressure created social change
as South Africa's government was forced to end racial segregation and give non-whites the right to vote.
Sinful Stock

What Does Sinful Stock Mean?

Stock from companies that are associated with (or are directly involved in) activities that are widely
considered to be unethical or immoral. 
Also known as "sin stock".

Investopedia explains Sinful Stock

Examples of activities some people may consider sinful include the distribution or production of alcohol,
tobacco, weapons and sex-related products. 
Vice Fund

What Does Vice Fund Mean?

A mutual fund that invests in gaming, such as casino operators and gaming equipment, alcohol, tobacco
and aerospace/defense sectors. The fund invests in both domestic and foreign-based equities, and
holdings range from small cap to mega cap companies.  

The fund has been in operation since 2002 and focuses on so-called "vices" that are considered by many
to be socially irresponsible investments, or "sin stocks".

Investopedia explains Vice Fund

The Vice Fund has little direct competition based on sector allocations, but as of 2007, it had
outperformed the Russell 1000 Index (its benchmark index) since its inception. The fund is considered
non-diversified, and carries a relatively high expense ratio of greater than 1.5% annually.  

The Vice Fund stands in stark contrast to the many socially conscious or responsible mutual funds on the
market, but it is based on the philosophy that sectors like gaming and alcohol have inherently solid
demand; therefore, companies that are leaders in these sectors should produce good returns for
shareholders.  
Target Risk Fund

What Does Target Risk Fund Mean?

A fund that attempts to expose its investors to a specified amount of risk. The fund manager of a target
risk fund is responsible for overseeing all the securities owned within the fund, to ensure that the level of
risk isn’t greater or less than the fund's target amount of risk exposure.

Investopedia explains Target Risk Fund

Target risk funds typically label themselves as "conservative", "moderate risk" or "aggressive" in terms of
their risk exposure. Regardless of the label applied, the intent is to offer a relatively constant level of risk
exposure to investors.

This allows investors who are considered highly risk averse to identify and select a fund of funds that has
a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk
exposure will not change substantially.

The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on
target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned
within the target risk fund) is compensation for the value-added service.
Country Risk

What Does Country Risk Mean?

A collection of risks associated with investing in a foreign country. These risks include political risk,
exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked
up or frozen by government action. Country risk varies from one country to the next. Some countries have
high enough risk to discourage much foreign investment.

Investopedia explains Country Risk

Country risk can reduce the expected return on an investment and must be taken into consideration
whenever investing abroad. Some country risk does not have an effective hedge. Other risk, such as
exchange rate risk, can be protected against with a marginal loss of profit potential. 

The United States is generally considered the benchmark for low country risk and most nations can have
their risk measured as compared to the U.S. Country risk is higher with longer term investments and
direct investments, which are investments not made through a regulated market or exchange.
Fund Manager

What Does Fund Manager Mean?

The person(s) resposible for implementing a fund's investing strategy and managing its portfolio trading
activities. A fund can be managed by one person, by two people as co-managers and by a team of three
or more people. Fund managers are paid a fee for their work, which is a percentage of the fund's average
assets under management.

Also known as an "investment manager".

Investopedia explains Fund Manager

The individuals involved in fund management (mutual, pension, trust funds or hedge funds) must have a
high level of educational and professional credentials and appropriate investment managerial experience
to qualify for this position. Investors should look for long-term, consistent fund performance with a fund
manager whose tenure with the fund matches its performance time period.

The whole point of investing in a fund is to leave the investment management function to the
professionals. Therefore, the quality of the fund manager is one of the key factors to consider when
analyzing the investment quality of any particular fund.
Fund Of Funds

What Does Fund Of Funds Mean?

A mutual fund that invests in other mutual funds. 

This method is sometimes known as "multi-management". 

Investopedia explains Fund Of Funds
A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with
investments in a variety of fund categories that are all wrapped up into one fund. However, if the fund of
funds carries an operating expense, investors are essentially paying double for an expense that is already
included in the expense figures of the underlying funds.
 
Historically, a fund of funds showed an expense figure that didn't always include the fees of the
underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line
called "Acquired Fund Fees and Expenses" (AFFE).
Master Fund

What Does Master Fund Mean?

In general, an investment vehicle that enables individual investors to invest money into one or more
underlying investments that are operated by professional managers.

Investopedia explains Master Fund

Master funds can generally be categorized into three types: discretionary funds, fund of funds, or feeder
funds.  With this last type, shares would be sold to the public only by the feeder fund, but invested through
the corresponding master fund.
Political Risk

What Does Political Risk Mean?

The risk that an investment's returns could suffer as a result of political changes or instability in a country.
Instability affecting investment returns could stem from a change in government, legislative bodies, other
foreign policy makers, or military control.  

Political risk is also known as "geopolitical risk", and becomes more of a factor as the time horizon of an
investment gets longer.

Investopedia explains Political Risk

Political risks are notoriously hard to quantify because there are limited sample sizes or case studies
when discussing an individual nation. Some political risks can be insured against through international
agencies or other government bodies.  

The outcome of a political risk could drag down investment returns or even go so far as to  remove the
ability to withdraw capital from an investment.
Risk Averse

What Does Risk Averse Mean?

A description of an investor who, when faced with two investments with a similar expected return (but
different risks), will prefer the one with the lower risk.
Investopedia explains Risk Averse
A risk-averse investor dislikes risk, and therefore will stay away from adding high-risk stocks or
investments to their portfolio and in turn will often lose out on higher rates of return. Investors looking for
"safer" investments will generally stick to index funds and government bonds, which generally have lower
returns.
Systematic Risk

What Does Systematic Risk Mean?

The risk inherent to the entire market or entire market segment. 

Also known as "un-diversifiable risk" or "market risk."

Investopedia explains Systematic Risk

Interest rates, recession and wars all represent sources of systematic risk because they affect the entire
market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of
securities, unsystematic risk affects a very specific group of securities or an
individual security. Systematic risk can be mitigated only by being hedged. 

Even a portfolio of well-diversified assets cannot escape all risk. 

Unsystematic Risk

What Does Unsystematic Risk Mean?

Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk
can be reduced through appropriate diversification. 

Also known as "specific risk", "diversifiable risk" or "residual risk".

Investopedia explains Unsystematic Risk

For example, news that is specific to a small number of stocks, such as a sudden strike by the employees
of a company you have shares in, is considered to be unsystematic risk. 
Target Risk Fund

What Does Target Risk Fund Mean?

A fund that attempts to expose its investors to a specified amount of risk. The fund manager of a target
risk fund is responsible for overseeing all the securities owned within the fund, to ensure that the level of
risk isn’t greater or less than the fund's target amount of risk exposure.
Investopedia explains Target Risk Fund
Target risk funds typically label themselves as "conservative", "moderate risk" or "aggressive" in terms of
their risk exposure. Regardless of the label applied, the intent is to offer a relatively constant level of risk
exposure to investors.

This allows investors who are considered highly risk averse to identify and select a fund of funds that has
a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk
exposure will not change substantially.

The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on
target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned
within the target risk fund) is compensation for the value-added service.
Committed Capital

What Does Committed Capital Mean?

A contractual agreement between an investor and a venture-capital fund that obligates the investor
to contribute money to the fund. The investor may pay all of the committed capital at one time, or
make contributions over a period of time. This often takes place over a number of years.

Also known as "commitments".

Investopedia explains Committed Capital

When an investor commits capital to a venture capital fund, the investor typically has many years to
satisfy the agreement. Often, contributions will be made over a period of three to five years after the fund
is formed. 

The private equity market can be viewed as riskier than the public equity market, as returns in the private
market tend to have higher dispersion of returns than the public market. Therefore, investing in the right
business ventures can offer substantial rewards for top tier funds.