Guide to Analysing Companies

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Risk capital
The sort of “high-risk” capital put up by private equity
and venture-capital firms. Because it goes to start-ups (often in
the form of “seed” capital) and other young companies, such in-
vestment is riskier than average and so requires a higher return.
Most risk capital is gathered from wealthy individuals or in
small amounts from larger financial institutions. It is usually
parcelled out to deserving cases by small firms running invest-
ment funds that specialise in such things.
Risk management
The sophisticated business of assessing and managing the many
different types of risk taken on by a company or by an in-
vestor. The process involves identifying and analysing the risks
and then deciding whether or not to reduce them. hedge
funds and other professional investors have computer pro-
grams to do this for them. There are three main ways of reduc-
ing risk: by insurance, by hedging and by reducing an
investor’s or a company’s exposure to that type of business.
Rocket scientist
A name given to the highly qualified mathematicians and com-
puter boffins employed by investment banks and financial
institutions. As markets have become more complex, so has the
job of the experts charged with the task of seeking out new op-
portunities and then of assessing the risks of those invest-
ments. (See also quant and quantitative analysis.)
Roll-over
The extension of a loan beyond its original final payment
date. So-called short-term loans can be rolled over so many
times that eventually they become long-term loans.
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Round lot
The minimum number of shares that can be offered to make
a trade on a stock exchange, normally 100 shares or $1,000-
worth or the equivalent for bonds. The minimum is usually
lower for thinly traded shares and higher for most orders placed
by institutions.
Roundtripping
The process whereby blue-chip companies borrow money
from banks using their overdraft and then place that
money in the money markets for a profit. This assumes that
the company’s cost of borrowing is low and that it can find rel-
atively risk-free places to park the money. It also refers to the
practice in the United States of making short-term trades in
financial instruments. Investors who do this can usually
negotiate lower rates of commission with their brokers.
Too much roundtripping of other people’s investments by a
professional investor can become churning (see churn).