Capital has stages
Venture capital funds an idea, private equity reshapes an established business, and public markets price companies that anyone can buy into. The same money does different work at each stage.
Lesson 03 · Markets
The investment industry.
The investment industry is not one job. It is four sectors that handle money at different stages of a company’s life—public markets, private equity, venture capital, and investment banking—each with its own time horizon, capital structure, and way of creating value. This guide walks through all four, then through the instruments, the analysis, and the positions that sit underneath them.
Back to all topicsPUBLIC MARKETS ✦ PRIVATE EQUITY ✦ VENTURE CAPITAL ✦ INVESTMENT BANKING ✦ EQUITIES ✦ FIXED INCOME ✦ COMMODITIES ✦ ETFS ✦ DCF ✦ LONG & SHORT
BEFORE YOU START
One industry, four different jobs.
Every sector in this lesson does the same basic thing—put capital to work and expect it back with a return. What separates them is when they arrive, what they can change, and how long they wait.
Each sector is paid differently
Asset managers charge on assets, hedge funds and private equity take a share of performance, and investment banks earn fees on deals that close. How a firm is paid shapes what it does.
Horizon drives behaviour
A trader may hold a position for days, a private equity fund for seven to ten years. Neither is more serious than the other—they are answering questions on different timescales.
UNIT 01 · THE SECTOR LANDSCAPE
Where the money sits, and for how long.
Four sectors, read the same way each time: what the firm is there to do, whose capital it uses, how long it holds, and where the return is supposed to come from.
Capital & structure
Client capital, proprietary capital, or strategic stakesRole: Provide liquidity, price discovery, and capital allocation across listed securities.
Strategies range from passive indexing and long-only to long/short, quantitative, and event-driven.
Horizon
High liquidity; short- to long-term
Value creation
Security selection, timing, arbitrage, harvesting risk premia
Who you will meet: Index funds, ETFs, hedge funds, holding companies
Capital & structure
LPs provide capital, GPs manage it; management fees plus carried interestRole: Acquire companies, improve how they operate, and exit at a higher valuation.
Deals are often leveraged buyouts, preceded by extensive due diligence.
Horizon
7–10+ years; exit by sale or IPO
Value creation
Revenue growth, margin expansion, operations, balance-sheet optimisation
Who you will meet: Buyout funds, limited partners, general partners
Capital & structure
Preferred equity, convertible notes, and SAFEsRole: Back high-potential startups from early rounds through to growth stage.
A high failure rate is expected; returns depend on a small number of outsized winners.
Horizon
Long-term, 5–10+ years; high risk
Value creation
Product-market fit, scaling, network effects, funding rounds, exits
Who you will meet: Venture funds, angel investors, founders
Capital & structure
Fee and commission based, contingent on the deal completingRole: Advise on transactions, raise capital, underwrite issues, and execute mergers and acquisitions.
The work is execution-heavy: financial modelling, valuation, and regulatory compliance.
Horizon
Deal by deal, weeks to months
Value creation
Structuring, distribution, and getting transactions over the line
Who you will meet: Advisory teams, underwriters, capital markets desks
UNIT 02 · PUBLIC-MARKET INSTRUMENTS
Every instrument is a claim on something.
The first column holds instruments you buy directly. The second holds wrappers that buy them on your behalf and pass the result back to you, minus costs.
Held directly
- Stocks (equities)
Ownership in a corporation. Shareholders are residual claimants—paid after creditors if the company is wound up.
Rights include voting, dividends, liquidation preference, and regulatory protections. Classes: common and preferred. - Bonds (fixed income)
A contractual promise to pay a coupon and return the principal on an agreed date.
Issued by governments, municipalities, and corporations. Price and yield move inversely. - Commodities
Physical goods—energy, metals, agriculture, and softs—accessed through futures, ETFs, or the companies that produce them.
Futures are standardised contracts priced off cost of carry and term structure.
Held through a fund
- ETFs
Baskets of securities that trade like a single stock, kept in line by a creation and redemption mechanism.
Index, sector, international, bond, commodity, active, and leveraged versions all exist. - What to check in an ETF
Liquidity, tracking error, expense ratio, and tax efficiency.
Two funds tracking the same index can still deliver different results after costs. - Mutual funds
Pooled assets priced once a day at net asset value rather than traded continuously.
Usually actively managed, with higher fees than a comparable index ETF.
THE TWO YOU WILL MEET MOST
Shares and bonds, one level deeper.
Equities and fixed income make up most of what trades in public markets. These are the details that change what a holding is actually worth.
Stocks — mechanics and valuation
- Share count
- Shares outstanding versus free float, treasury shares, and the dilution that comes from issuing more.
- Dividends
- The policy itself, whether it is sustainable, and what a change in it signals to the market.
- Corporate actions
- Splits, buybacks, spin-offs, and mergers—each changes the shape of a shareholder’s claim.
- Valuation metrics
- EPS, P/E, P/B, EV/EBITDA, ROE, and ROIC put the price in context.
- Red flags
- Aggressive revenue recognition, frequent capital raises, and declining cash flow.
Bonds — pricing and risk
- Pricing and yields
- The inverse price-yield relationship, plus yield to maturity, yield to worst, and yield to call.
- Duration and convexity
- How sensitive a bond’s price is to a change in interest rates, and how that sensitivity itself changes.
- Special structures
- Inflation-linked, floating-rate, zero-coupon, and callable or putable issues.
- Credit
- The issuer’s credit quality, leverage, and the covenant structure protecting lenders.
UNIT 03 · EVALUATING A STOCK
Seven steps, in this order.
Analysis is a sequence. Each step narrows what the next one has to explain, and skipping ahead to valuation is how people end up modelling numbers they have not checked.
Information gathering
Start with primary sources: the 10-K, the 10-Q, earnings transcripts, MD&A, and proxy statements. Then add industry reports, competitor filings, and macroeconomic data.
Financial statement analysis
Trend revenue, EBITDA, net income, and cash flow. Track gross, operating, and net margins. Compare operating cash flow with net income, and read net debt, liquidity, and working capital off the balance sheet.
Quality of earnings
Reconcile net income back to cash flow. Strip out non-GAAP adjustments and one-offs, and check revenue recognition policies—accrual earnings and cash earnings are not the same thing.
Profitability and capital efficiency
Use ROIC, ROE, and a DuPont decomposition to see where returns come from. Then look at capital allocation: dividends, buybacks, acquisitions, and debt repayment.
Growth and competitive position
Separate organic growth from acquisitions and size the market that is left. Then test the moat: network effects, switching costs, regulatory barriers, technology, and brand.
Management and governance
Look at board composition, independence, and committees; management’s record of execution against its own guidance; insider transactions; and whether compensation is genuinely tied to performance.
Valuation and scenario analysis
Build a DCF from projected free cash flow, a terminal value, and a discount rate (WACC). Cross-check it against peer multiples and precedent transactions, then run base, bull, and bear cases.
UNIT 04 · READING FINANCIAL STATEMENTS
Three statements and the notes behind them.
Each statement answers a different question, and each comes with one practical check worth running before you trust it.
Income statement
What the company earned over a period, and what it cost to earn it.
- Revenue and how it is recognised, COGS, operating expenses, margins
- Non-operating items: interest, gains and losses
- EPS and any non-GAAP adjustments
Balance sheet
What the company owns, what it owes, and what is left for shareholders.
- Assets: cash, receivables, inventory, PP&E, intangibles
- Liabilities: debt, payables, pension obligations
- Equity: share capital, retained earnings, AOCI
- Working capital and leverage metrics
Cash flow statement
Where cash actually came from and where it went.
- Operating: net income adjusted for non-cash items
- Investing: capex, acquisitions, asset sales
- Financing: dividends, buybacks, debt and equity issuance
- Free cash flow: operating cash flow minus capex
Footnotes
The detail behind the three statements—and often the most useful part.
- Accounting policies and the judgements behind them
- Segment detail, commitments, and contingencies
- The assumptions that the headline numbers depend on
UNIT 05 · LONG VS SHORT
The two directions, and what each one costs.
A long position and a short position are not mirror images. One risks the money you put in; the other risks more than that.
Going long
Buy the shares. You profit if the price rises, and you receive dividends and voting rights while you hold.
- Maximum loss is the capital you invested.
- Managed through position sizing, diversification, and clear exit rules.
- Time is broadly on your side—you can wait.
Max loss = invested capital
Short selling
Borrow shares, sell them, and repurchase later to return them. You profit if the price falls in between.
- Requires margin and collateral with your broker.
- Costs include borrow fees, interest, and any dividends owed to the lender.
- Exposed to short squeezes and recall risk if the lender wants the shares back.
Potential loss is unlimited
Risk controls
Decide how much of the portfolio a single idea can occupy, and at what point the position is closed, before the trade is on.
Options can cap the downside on a position, at the cost of the premium paid for that protection.
Watch short interest, liquidity, and upcoming catalysts—earnings, rulings, and index changes all move crowded positions quickly.
Understanding the sectors, the instruments, and the analysis behind them turns the investment industry from a set of job titles into a system you can reason about.
Whether you end up working in it or simply investing alongside it, the same questions apply: who is providing the capital, over what horizon, on what terms, and how does that capital expect to be paid back.
HOW TO USE THIS
Follow the capital, then check the cash.
- Ask which sector a firm sits in before judging its behaviour—horizon and fee structure explain most of it.
- Instruments are claims. A share is a residual claim on profits, a bond is a contractual one, and a fund is a wrapper around either.
- Evaluating a stock is a sequence, not a single ratio: gather filings, test earnings quality, then value the business under more than one scenario.
- Reconcile profit to cash every time. Most warning signs show up in the gap between net income and operating cash flow.
- A long position risks what you put in. A short position risks more than that, which is why sizing and stop rules come first.
Lesson 03 slides
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