What does DLOM stand for in relation to investments?

DLOM stands for Discount for Lack of Marketability, which is a significant concept in the area of corporate finance and valuation. This discount reflects the inherent risks and costs associated with illiquid investments, which refers to assets that are not easily transferable to cash without a substantial price concession.

When investors evaluate the value of an investment, they often consider its marketability—the ease with which it can be sold in the market. An asset that lacks liquidity typically requires a discount to compensate for the difficulty of selling it, especially in unsaturated or private markets where there may not be a ready pool of buyers. This discount acts as a risk adjustment factor; it recognizes that investors will demand a higher return for investments that cannot be quickly converted to cash.

The concept of DLOM primarily comes into play during business valuations, especially in the appraisal of private businesses or restricted stock, where market transactions are limited. Investors and appraisers apply this discount to ensure that the valuation reflects the true economic conditions and risks associated with the investment's liquidity level.

Understanding DLOM is crucial for making informed investment decisions and for accurately determining the value of an asset or a business, especially in circumstances where traditional market factors do not apply.