private equity
Investment in companies that are not listed on public stock exchanges, typically with the goal of restructuring and selling them for profit.
Example
“The private equity firm bought the struggling retailer, turned it around, and sold it five years later.”
Memory Tip
PRIVATE equity = ownership in PRIVATE companies, not ones you can buy on the stock market.
Why It Matters
Private equity matters because these investments can offer higher returns than public stocks, but they also carry greater risk and require significant capital. Understanding private equity is important if you are considering alternative investments or if your retirement account includes exposure to these types of companies through funds or indirect holdings.
Common Misconception
Many people believe private equity firms always improve companies they acquire, but in reality some firms focus primarily on cost-cutting and rapid resale rather than genuine operational improvements. Another misconception is that private equity is only for wealthy individuals, when in fact many middle-class investors gain exposure through pension funds and mutual funds without realizing it.
In Practice
A private equity firm might purchase a struggling retail company with 500 stores for 2 billion dollars, then reduce operating costs by 30 percent, improve store layouts, and sell the company three years later for 3.5 billion dollars, earning a 1.5 billion dollar profit that gets split among the firm and its investors.
Etymology
Private (not public) + equity (ownership) — ownership in private (non-public) companies.
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
Other investing terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.