Financial Glossary D
Daily trading limit
The daily trading limit is the most that the price of a futures contract can rise or fall in a single session before trading in that contract is stopped for the day. Trading limits are designed to protect investors from wild price fluctuations and the potential for major losses. They’re comparable to the circuit breakers established by stock exchanges to suspend trading when prices fall by a specific percentage.
Date of maturity
The date of maturity, or maturity date, is the day on which a bond’s term ends, and its issuer repays the principal and makes the final interest payment. When the phrase is used in connection with mortgages or other personal loans, the date of maturity is the day your last payment is due and your debt is repaid.
A day order is an instruction you give to your broker to buy or sell a security at the market price or at a particular price you name before the end of the trading day. The order expires if it isn’t filled. In contrast, a good ’til canceled (GTC) order remains open on the broker’s books until it’s filled, you cancel it, or the brokerage firm’s time limit for GTCs expires.
When you continuously buy and sell investments within a very short time, perhaps a few minutes or hours, and rarely hold them overnight, you’re considered a day trader. The strategy is to take advantage of rapid price changes to make money quickly. The risk is that as a day trader you can lose substantial amounts of money since no one can predict how or when prices will change. That risk is compounded by the fact that technology does not always keep pace with investors’ orders, so if you authorize a sell at one price the price it’s executed at may be higher or lower, wiping out potential profit. In addition, you pay transaction costs on each buy and sell order. Your gains must be large enough to offset those costs if you’re going to come out ahead.
Dealers, or principals, buy and sell securities for their own accounts, adding liquidity to the marketplace and seeking to profit from the spread between the prices at which they buy and sell. In the over-the-counter market, in most cases, it is dealers — also called market makers — who provide the bid and ask quotes you see when you look up the price of a security. Those dealers are willing to commit their capital to specific securities and are ready to trade the securities at the quoted prices.
A death benefit is money your beneficiary collects from your life insurance policy if you die while the policy is still in force. In most cases, the beneficiary receives the face value of the policy as a lump sum. However, the death benefit is reduced by the amount of any unpaid loans you’ve taken against the policy. Some retirement plans, including Social Security, also provide a one-time death benefit to your beneficiary at the time of your death.
A debenture is an unsecured bond. Most bonds issued by corporations are debentures, which are backed by its reputation rather than by any collateral, such as the company’s buildings or its inventory. Although debentures sound riskier than secured bonds, they aren’t when they’re issued by well-established companies with good credit ratings.
A debit is the opposite of a credit. A debit may be an account entry representing money you owe a lender or money that has been taken from your account. For example, your bank debits your checking account for the amount of a check you’ve written, and your broker debits your investment account for the cost of a security you’ve purchased. Similarly, a debit card authorizes the bank to take money out of your bank account electronically, either as cash or as an on-the-spot payment to a merchant. That’s different from a credit card, which authorizes you to borrow the money from the card issuer.
A debit balance is what you owe. It’s entered as accounts receivable on the books of the lender and appears on your account statement as a liability. For example, if you have a margin account and borrow money to buy stock, your monthly brokerage statement will show a debit balance for the amount of the margin loan.
A debit card — sometimes called a cash plus card — allows you to make point-of-sale (POS) purchases by swiping the card through the same type of machine you use to make credit card purchases. Sometimes you authorize a debit card transaction with your personal identification number (PIN). Other times, you sign a receipt just as you would if you were charging the purchase to your credit card. You can also use the card to make ATM withdrawals.When you use a debit card, the amount of your purchase is debited, or subtracted, from your account at the time of the transaction and transferred electronically to the seller’s account. You have some of the same protections against loss with a debit card as you do with a credit card, but there is one important difference. While $50 is the most you can ever be responsible for if your credit card is lost or stolen, you could lose much more with a lost or stolen debit card if you don’t report that has happened within two days of discovering it. If you delay reporting a missing card, you could lose up to $500. And if you wait more than 60 days after receiving a bank statement that includes a fraudulent use of your card, you could lose everything in your account including your overdraft line of credit. You can find the specific rules on the Federal Trade Commission website at www.ftc.gov.In addition, if you purchase defective merchandise with a debit card there are no refunds. Most credit card issuers do not, generally speaking, make you pay for defective products.
A debt is an obligation to repay an amount you owe. Debt securities, such as bonds or commercial paper, are forms of debt that bind the issuer, such as a corporation, bank, or government, to repay the security holder. Debts are also known as liabilities.
Debt securities are interest-paying bonds, notes, bills, or money market instruments that are issued by governments or corporations. Some debt securities pay a fixed rate of interest over a fixed time period in exchange for the use of the principal. In that case, that principal, or par value, is repaid at maturity. Some are pass-through securities, with principal and interest repaid over the term of the loan. Still other issues are sold at discount, with interest included in the amount paid at maturity. US Treasury bills, corporate bonds, commercial paper, and mortgage-backed bonds are all examples of debt securities.
A company’s debt-to-equity ratio indicates the extent to which the company is leveraged, or financed by credit. A higher ratio is a sign of greater leverage. You find a company’s debt-to-equity ratio by dividing its total long-term debt by its total assets minus its total debt. You can find these figures in the company’s income statement, provided in its annual report. Average ratios vary significantly from one industry to another, so what is high for one company may be normal for another company in a different industry. From an investor’s perspective, the higher the ratio, the greater the risk you take in investing in the company. But your potential return may be greater as well if the company uses the debt to expand its sales and earnings.
US stocks, derivatives linked to stocks, and some bonds trade in decimals, or dollars and cents. That means that the spread between the bid and ask prices can be as small as one cent.The switch to decimal stock trading, which was completed in 2001, was the final stage of a conversion from trading in eighths, or increments of 12.5 cents. Trading in eighths originated in the 16th century, when North American settlers cut European coins into eight pieces to use as currency. In an intermediary phase during the 1990s, trading was handled in sixteenths, or increments of 6.25 cents.
Stocks that have dropped, or fallen, in value over a particular period are described as decliners. If more stocks decline than advance, or go up in value, over the course of a trading day, the financial press reports that decliners led advancers. The indexes that track the market may decline as well. If decliners dominate for a period of time, the market may also be described as bearish.
Decreasing term insurance
With a decreasing term life insurance policy, the amount of the death benefit decreases each year of the fixed term — such as 20 years — although the premium remains the same. This type of insurance tends to be an economical way to protect your beneficiaries should you die unexpectedly during a period when you have substantial financial responsibilities.For example, young parents with a large mortgage might consider decreasing term policies to help insulate each other against the responsibility of meeting their financial obligations should something happen to one of them.
A deductible is the dollar amount you must pay for healthcare, damage to your property, or any other insurable claim before your insurance company begins to cover the cost of the bill. For example, if you have a health insurance policy with an annual $300 deductible, you have to spend $300 of your own money before your insurer will pay whatever portion of the rest of the year’s bills it has agreed to cover. However, in some types of policies, the deductible is per event, not per year. Generally speaking, the higher the deductible you agree to pay, the lower your insurance premiums tend to be. However, the deductible for certain coverage is fixed by the insurance provider. That’s the case with Original Medicare.
A deduction is an amount you can subtract from your gross income or adjusted gross income to lower your taxable income when you file your income tax return Certain deductions, such as money contributed to a traditional IRA or interest payments on a college loan, are available only to taxpayers who qualify for these deductions based on specific expenditures or income limits, or both. Other deductions are more widely available. For example, you can take a standard deduction, an amount that’s fixed each year. And if your expenses for certain things, such as home mortgage interest, real estate taxes, and state and local income taxes, total more than the standard deduction, it may pay for you to itemize deductions instead. However, if your adjusted gross income is above the amount Congress sets for the year, you may lose some or all of these deductions.
A deed is a written document that transfers ownership of land or other real estate from the owner, also known as the grantor, to the buyer, or grantee. The form a deed takes varies from place to place, but the overall structure and the provisions it contains are the same. The description of the property being transferred is always included.When you use a mortgage to purchase the property that’s being transferred by deed, you may receive the deed at the time of purchase, with the lender holding a lien on the property. Or the deed may belong to the lender until you have paid off the mortgage. In either case, a deed’s creation must be witnessed and should be recorded with the appropriate local authority to ensure its validity.
Deep discount bond
Deep discount bonds are originally issued with a par value, or face value, of $1,000. But they decline in value by at least 20% — to a market value of $800 or less — typically because interest rates have increased.They may also decline if people believe the company may have difficulty making the interest payment or repaying the principal. Either way, investors will no longer pay full price for the bond. Deep discount bonds are different from original issue discount bonds, which are sold at less than par value and accumulate interest until maturity, when they can be redeemed for par value. Zero-coupon bonds are an example of original issue discount bonds.
Deep discount brokerage firm
A financial services company that offers rock-bottom rates for large-volume securities transactions is sometimes described as a deep discount firm. However, online brokerage firms or electronic communications networks (ECNs) may offer investors cheaper prices for even small-volume trades.
If a person or institution responsible for repaying a loan or making an interest payment fails to meet that obligation on time, that person or institution is in default.If you are default, you may lose any property that you put up as collateral to get the loan. For example, if you fail to repay your car loan, your lender may repossess the car. Defaulting has a negative impact on your credit history and your credit score, which generally makes it difficult to borrow again in the future. In fact, failure to pay on time is the single most important contributor to a poor credit history.A bond issuer who defaults may not pay interest when it comes due or repay the principal at maturity, or both.
Defensive securities tend to remain more stable in value than the overall market, especially when prices in general are falling. Defensive securities include stocks in companies whose products or services are always in demand and are not as price-sensitive to changes in the economy as other stocks. Some defensive securities could be stock in food, pharmaceuticals, and utilities companies.Defensive securities may also be known as countercyclicals.
A deferred annuity contract allows you to accumulate tax-deferred earnings during the term of the contract and sometimes add assets to your contract over time. In contrast, an immediate annuity starts paying you income right after you buy.Your deferred annuity earnings can be either fixed or variable, depending on the way your money is invested.Deferred annuities are designed primarily as retirement savings accounts, so you may owe a penalty if you withdraw principal, earnings, or both before you reach age 59 1/2.
Defined benefit plan
A defined benefit plan — popularly known as a pension — provides a specific benefit for retired employees, either as a lump sum or as income for the rest of their lives. Sometimes the employee’s spouse receives the benefit for life as well. The pension amount usually depends on the employee’s age at retirement, final salary, and the number of years on the job. All the details are spelled out in the plan. However, an employer may end its defined benefit plan or replace this traditional source of retirement income with defined contribution or cash balance plans.
Defined contribution plan
In a defined contribution retirement plan, the benefits — that is, what you can expect to accumulate and ultimately withdraw from the plan — are not predetermined, as they are with a defined benefit plan.Instead, the retirement income you receive will depend on how much is contributed to the plan, how it is invested, and what the return on the investment is.One advantage of defined contribution plans, such as 401(k)s, 403(b)s, 457s, and profit-sharing plans, is that you often have some control over how your retirement dollars are invested. Your choice may include stock or bond mutual funds, annuities, guaranteed investment contracts (GICs), company stock, cash equivalents, or a combination of these choices.An added benefit is that, if you switch jobs, you can take your accumulated retirement assets with you, either rolling them into an individual retirement plan (IRA) or a new employer’s plan if the plan accepts transfers.
Deflation, the opposite of inflation, is a gradual drop in the cost of goods and services, usually caused by a surplus of goods and a shortage of cash. Although deflation seems to increase your buying power in its early stages, it is generally considered a negative economic trend. That’s because it is typically accompanied by rising unemployment, falling production, and limited investment.
The delivery date, also known as the settlement date, is the day on which a stock, option, or bond trade must be settled, or finalized. For stocks, the delivery date is three business days after the trade date, or T + 3. For listed options and government securities, it’s one day after the trade date, or T + 1.If you’re the seller, your brokerage firm must turn over the security by the delivery date or transfer the record of ownership to the account of another of its clients who has purchased the security. That process is called netting. If you’re the buyer, you must provide payment by the delivery date so that the transaction can be finalized. You may pay through a margin or money market account with the brokerage firm, by check or electronic transfer, or by instructing your broker to sell other investments.
The relationship between an option’s price and the price of the underlying stock or futures contract is called its delta. If the delta is 1, for example, the relationship of the prices is 1 to 1. That means there’s a $1 change in the option price for every $1 change in the price of the investment.With a call option, an increase in the price of an underlying investment typically results in an increase in the price of the option. An increase in a put option’s price is usually triggered by a decrease in the price of the underlying investment, since investors buy put options expecting stock prices to fall.
Department of Veterans Affairs (VA) mortgage
Department of Veterans Affairs (VA) mortgages enable qualifying veterans or their surviving spouses to borrow up to the annual federal limit in order to buy conventional homes, mobile homes, and condominiums with little or no down payment. The VA guarantees repayment of the loans. This federal guarantee means that banks and thrift institutions can afford to provide 30-year VA mortgages on favorable terms even during periods when borrowing in general is expensive. Interest rates on these mortgages, formerly fixed by the Department of Housing and Urban Development (HUD), are now set by the VA itself. For more information, call the VA’s local toll-free number listed in your phone book.
A US bank that holds American depositary shares (ADSs), or shares of corporations based outside the United States, and sells American depositary receipts (ADRs) to US investors is called a depositary bank. Each ADR represents a specific number of ADSs, based on the bank’s agreement with the issuing corporation. The depositary bank ensures that investors receive dividends and capital gains and handles tax payments that may be due in the country where the share-issuing company is headquartered.
Depository Trust and Clearing Corporation (DTCC)
The DTCC is the world’s largest securities depository, holding trillions of dollars in assets for the members of the financial industry that own the corporation. It is also a national clearinghouse for the settlement of corporate and municipal securities transactions. The DTCC, a member of the Federal Reserve System, was created in 1999 as a holding company. It has two primary subsidiaries, the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC). It is also the holding company for the Emerging Market Clearing Corporation (EMCC) and the Fixed Income Clearing Corporation (FICC).The FICC was formed as a merger of the Government Security Clearing Corporation (GSCC) and the Mortgage Backed Security Clearing Corporation (MBSCC).
Certain assets, such as buildings and equipment, depreciate, or decline in value, over time. You can amortize, or write off, the cost of such an asset over its estimated useful life, thereby reducing your taxable income without reducing the cash you have on hand.
A depression is a severe and prolonged downturn in the economy. Prices fall, reducing purchasing power. There tends to be high unemployment, lower productivity, shrinking wages, and general economic pessimism. Since the Great Depression following the stock market crash of 1929, the governments and central banks of industrialized countries have carefully monitored their economies. They adjust their economic policies to try to prevent another financial crisis of this magnitude.
Derivatives are financial products, such as futures contracts, options, and mortgage-backed securities. Most of derivatives’ value is based on the value of an underlying security, commodity, or other financial instrument. For example, the changing value of a crude oil futures contract depends primarily on the upward or downward movement of oil prices.An equity option’s value is determined by the relationship between its strike price and the value of the underlying stock, the time until expiration, and the stock’s volatility.Certain investors, called hedgers, are interested in the underlying instrument. For example, a baking company might buy wheat futures to help estimate the cost of producing its bread in the months to come.Other investors, called speculators, are concerned with the profit to be made by buying and selling the contract at the most opportune time. Listed derivatives are traded on organized exchanges or markets. Other derivatives are traded over-the-counter (OTC) and in private transactions.
Devaluation is a deliberate decision by a government or central bank to reduce the value of its own currency in relation to the currencies of other countries. Governments often opt for devaluation when there is a large current account deficit, which may occur when a country is importing far more than it is exporting.When a nation devalues its currency, the goods it imports and the overseas debts it must repay become more expensive. But its exports become less expensive for overseas buyers. These competitive prices often stimulate higher sales and help to reduce the deficit.
A DIAMOND is an index-based unit investment trust (UIT) that holds the 30 stocks in the Dow Jones Industrial Average (DJIA). It’s similar in structure to an exchange traded fund (ETF). Investors buy shares, or units, of the trust, which is listed on the American Stock Exchange (AMEX) as DIA. The share price changes throughout the day as investors buy and sell, just as share prices of stocks do. That’s in contrast to open-end mutual funds whose share prices change just once a day, when trading in their underlying investments ends for the day. Part of the appeal of DIAMOND shares is that the trust mirrors the performance of its benchmark index for dramatically less than the cost of buying shares in all 30 stocks in the DJIA. A DIAMOND share trades at about 1/100 the value of the DJIA. So, for example, if the DJIA is at 11,500, shares in the trust will be priced around $115.
Diluted earnings per share
In addition to reporting earnings per share, corporations must report diluted earnings per share. This accounts for the possiblity that all outstanding warrants and stock options are exercised, and all convertible bonds and preferred shares are exchanged for common stock. Diluted earnings actually report the smallest potential earnings per common share that a company could have based on its current earnings. In theory, at least, knowing the diluted earnings could influence how much you would be willing to pay for the stock.
Dilution occurs when a company issues additional shares of stock, and as a result the earnings per share and the book value per share decline. This happens because earnings per share and book value per share are calculated by dividing the total earnings or book value by the number of existing shares. The larger the number of shares, the lower the value of each share. Lower earnings per share may trigger a selloff in the stock, lowering its price. That’s one reason a company may choose to issue bonds rather than new stock to raise additional capital.Similarly, if companies merge or one buys another, earnings may be diluted if they don’t increase proportionately with the combined number of shares in the newly created company.Dilution can also occur if warrants and stock options on a stock are exercised, and if convertible bonds and preferred stock the company issued are converted to common stock. Companies must report the worst-case potential for such dilution, or loss of value, to their shareholders as diluted earnings per share.
Direct deposit is the electronic transfer of money from a payer, such as your employer or a government agency, directly into a bank account you designate. Direct deposit is faster and cheaper than sending a check and also more secure, which is why both payers and banks prefer this system. In fact, banks often provide free checking or other benefits if your paychecks are deposited directly.
You can make a direct investment in a company’s stock through dividend reinvestment plans (DRIPs) and direct purchase plans (DPPs). If a company in which you own stock offers a DRIP, you have the opportunity to re-invest cash dividends and capital gains distributions in more stock automatically each time they are paid. In the case of DPPs, also known as direct stock purchase plans (DSPs), companies can sell their stock directly to investors without using a brokerage firm as intermediary.Direct investment also refers to long-term investments in limited partnerships that invest in real estate, leased equipment, and energy exploration and development. In this type of investment, you become part owner of the hard assets of the enterprise.You realize income from your investment by receiving a portion of the business’s profits, for example, from rents, contractual leasing payments, or oil sales. In some cases you realize capital gains at the end of the investment term, if the business sells its assets.These DPPs are largely nontraded and have no formal secondary markets. This means you will often have to hold the investment for terms of eight years or more, with no guarantee that any of the income or capital gains will materialize. Many people make direct investments because there can be significant tax benefits, such as tax deferral and tax abatement, depending on the investment.
Direct purchase plan (DPP)
Some publicly held companies offer a direct purchase plan that lets you purchase their stock directly without using a broker. You may pay a small commission or transaction fee — smaller than if you purchased the shares through a retail broker — although some DPPs charge no fee at all.Direct purchase plans are similar to dividend reinvestment plans, or DRIPs, with the added benefit that you can make the initial purchase of the company’s stock through the plan rather than having to purchase stock first, through a broker, in order to be eligible for a DRIP.It’s easy to open a DPP account, and because it lets you purchase fractional shares of the company’s stock, you can decide whether to invest a lump sum or make small, regular purchases on a set schedule to build your investment. Your shares are registered on the company’s books, and you can sell your shares through the plan as well.
A disclosure document explains how a financial product or offering works. It also details the terms to which you must agree in order to buy it or use it, and, in some cases, the risks you assume in making such a purchase.For example, publicly traded companies must provide all available information that might influence your decision to invest in the stocks or bonds they issue. Mutual fund companies are required to disclose the risks and costs associated with buying shares in the fund. Government regulatory agencies, such as the Securities and Exchange Commission (SEC), self-regulating organizations, state securities regulators, and NASD require such disclosures.Similarly, federal and local governments require lenders to explain the costs of credit, and banks to explain the costs of opening and maintaining an account.Despite the consumer benefits, disclosure information isn’t always easily accessible. It may be expressed in confusing language, printed in tiny type, or so extensive that consumers choose to ignore it.
When bonds sell for less than their face value, they are said to be selling at a discount. Bonds sell at a discount when the interest rate they pay is lower than the rate on more recently issued bonds or when the financial condition of the issuer weakens. In the case of rising interest rates, demand for older, lower-paying bonds drops as investors put their money into newer, higher-paying alternatives, so the prices of the older bonds drop. If a rating agency reduces a bond’s rating, the market price tends to drop because investors demand a higher yield for the additional risk they take in buying the bond. Similarly, closed-end mutual funds may trade at a discount to their net asset value (NAV) as a result of weak investor demand or other market forces. Preferred stocks may also trade at a discount. In contrast, certain bonds, called original issue discount bonds, or deep discount bonds, are issued at a discount to par value, or full face value, but are worth par at maturity.
Discount brokerage firm
Discount brokerage firms charge lower commissions than full-service brokerage firms when they execute investors’ buy and sell orders but may provide fewer services to their clients. For example, they may not offer investment advice or maintain independent research departments. Because of the information and online account access on most brokerage websites, differences between full-service and discount firms are less apparent to the average investor.
Some lenders require you to prepay a portion of the interest due on your mortgage as a condition of approving the loan. They set the amount due at one or more discount points, with each discount point equal to 1% of the mortgage loan principal. For instance, if you must pay one point on a $100,000 mortgage, you owe $1,000. From your perspective, the advantages of paying discount points are that your long-term interest rate is lowered slightly for each point you pay, and prepaid interest is tax deductible. The advantage, from the lenders’ point of view, is that they collect some of their interest earnings up front.
The discount rate is the interest rate the Federal Reserve charges on loans it makes to banks and other financial institutions. The discount rate becomes the base interest rate for most consumer borrowing as well. That’s because a bank generally uses the discount rate as a benchmark for the interest it charges on the loans it makes. For example, when the discount rate increases, the interest rate that lenders charge on home mortgages and other loans increases. And when the discount rate is lowered, the cost of consumer borrowing eventually decreases as well. The term discount rate also applies to discounted instruments like US Treasury bills. In this case, the rate is used to identify the interest you will earn if you purchase at issue, hold the bill to maturity, and receive face value at maturity. The interest is the difference between what you pay to purchase the bills and the amount you are repaid.
A discretionary account is a type of brokerage account in which clients authorize their brokers to buy and sell securities on their behalf without prior consent for each transaction. A client may set guidelines for the account, such as the types of securities the broker may purchase. However, the broker can buy and sell shares at his or her discretion.Managed accounts — also called separate accounts and wrap accounts — are one type of discretionary account.
Disinflation is a slowdown in the rate of price increases that historically occurs during a recession, when the supply of goods is greater than the demand for them. Unlike deflation, however, when prices for goods actually drop, disinflation prices do not usually fall, but the rate of inflation becomes negligible.
Dispute resolution — sometimes called alternative dispute resolution — refers to methods of resolving conflicts between parties or individuals that doesn’t involve litigation.Mediation and arbitration are two forms of dispute resolution that are frequently used when conflicts arise between investors and the brokers or investment advisers with whom they work.If you have a conflict that you’ve been unable to resolve by talking with your broker and the firm, you can file a complaint with NASD or the New York Stock Exchange (NYSE), the self-regulatory body that regulates brokerage firms and uses mediators and arbitrators to help resolve disputes. If your conflict is with a registered investment adviser, you should contact the Securities and Exchange Commission (SEC).Advocates of dispute resolution note that it tends to be quicker, cheaper, and less confrontational than litigation.
A distribution is money a mutual fund pays its shareholders either from the dividends or interest it earns or from the capital gains it realizes on the sale of securities in its portfolio. Unless you own the fund through a tax-deferred or tax-free account, you owe federal income tax on most distributions, the exception being interest income from municipal bond funds. That tax is due whether or not you reinvest the money to buy additional shares in the fund.You’ll owe tax at your regular rate on short-term gains and on income from interest. The tax on qualifying dividends and long-term gains is calculated at your long-term capital gains rate. Your end-of-year statement will indicate which income belongs to each category. The term distribution is also used to describe certain actions a corporation takes. For example, if a corporation spins off a subsidiary as a standalone company, it will issue shares in that subsidiary to current stockholders. That’s considered a distribution. Corporate dividends may also be described as distributions.
Diversification is an investment strategy in which you spread your investment dollars among different sectors, industries, and securities within a number of asset classes. A well-diversified stock portfolio, for example, might include small-, medium-, and large-cap domestic stocks, stocks in six or more sectors or industries, and international stocks. The goal is to protect the value of your overall portfolio in case a single security or market sector takes a serious downturn.Diversification can help insulate your portfolio against market and management risks without significantly reducing the level of return you want. But finding the diversification mix that’s right for your portfolio depends on your age, your assets, your tolerance for risk, and your investment goals.
Corporations may pay part of their earnings as dividends to you and other shareholders as a return on your investment. These dividends, which are often declared quarterly, are usually in the form of cash, but may be paid as additional shares or scrip. You may be able to reinvest cash dividends automatically to buy additional shares if the corporation offers a dividend reinvestment program (DRIP).Dividends are taxable unless you own the investment through a tax-deferred account, such as an employer sponsored retirement plan or individual retirement annuity (IRA). That applies whether you reinvest them or not. However, dividends on most US and many international stocks are considered qualifying dividends. That means you owe tax at your long-term capital gains rate provided you have owned the stocks the required length of time.Dividends on real estate investment trusts (REITs), mutual savings banks, and certain other investments aren’t considered qualifying and are taxed at your regular rate.
Dividend payout ratio
You can calculate a dividend payout ratio by dividing the dividend a company pays per share by the company’s earnings per share. The normal range is 25% to 50% of earnings, though the average is higher in some sectors of the economy than in others. Some analysts think that an unusually high ratio may indicate that a company is in financial trouble but doesn’t want to alarm shareholders by reducing its dividend.
Dividend reinvestment plan (DRIP)
Many publicly held companies allow shareholders to reinvest dividends in company stock or buy additional shares through dividend reinvestment plans, or DRIPs. Enrolling in a DRIP enables you to build your investment gradually, taking advantage of dollar cost averaging and usually paying only a minimal transaction fee for each purchase.Many DRIPs will also buy back shares at any time you want to sell, in most cases for a minimal sales charge.One potential drawback of purchasing through a DRIP is that you accumulate shares at different prices over time, making it more difficult to determine your cost basis — especially if you want to sell some but not all of your holding.
If you own dividend-paying stocks, you figure the current dividend yield on your investment by dividing the dividend being paid on each share by the share’s current market price. For example, if a stock whose market price is $35 pays a dividend of 75 cents per share, the dividend yield is 2.14% ($0.75 ÷ $35 = .0214, or 2.14%). Yields for all dividend-paying stocks are reported regularly in newspaper stock tables and on financial websites.Dividend yield increases as the price per share drops and drops as the share price increases. But it does not tell you what you’re earning based on your original investment or the income you can expect to earn in the future. However, some investors seeking current income or following a particular investment strategy look for high-yielding stocks.
Dogs of the Dow
If you follow a Dogs of the Dow investment strategy, you buy the ten highest-yielding stocks in the Dow Jones Industrial Average (DJIA) on the first of the year and hold them for a year. According to this theory, the dogs will, over the year, produce a total return, or combination of dividends plus price appreciation, that’s higher than the return on the DJIA as a whole. The increasing price is the result of demand for the high-yielding stock.On the anniversary of your purchase, the stocks are no longer dogs because their higher prices reduce their current yield even if the dividend remains the same. So you sell them and buy the next batch of dogs.
Dollar cost averaging
Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund or a dividend reinvestment plan (DRIP). Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower.The advantage of this type of formula investing, which may also be called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share. But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices.Despite its advantages, dollar cost averaging does not guarantee a profit and doesn’t protect you from losses in a falling market.
Your domicile is your permanent residence, which you demonstrate by using it as your primary home, holding a driver’s license using that address, and registering to vote in that district. Your domicile affects your state and local income taxes, state estate and inheritance taxes, and certain other tax benefits or liabilities.
Domini Social Index 400
The Domini Social Index 400 is a market capitalization weighted index that tracks the performance of companies that meet a wide range of social and environmental standards. For instance, the index screens out companies that manufacture or promote alcohol, tobacco, gambling, weapons, and nuclear power. It includes others that have outstanding records of social responsibility.About half the stocks included in the Standard & Poor’s 500-stock Index (S&P 500), on which the Domini Index is modeled, make the cut, including giants like Microsoft and Coca-Cola. The other stocks are selected based on the industries they represent and their reputations for socially conscious business practices. The index is considered a benchmark for measuring the effect that selecting socially responsible stocks has on a financial portfolio’s performance. This practice may also be called social screening.
Double bottom is term that technical analysts use to describe a stock price pattern that, when depicted on a chart, shows two drops to the same dollar amount separated by a rebound. For example, if a stock that had been trading about $28 a share dropped to $18, rebounded to trade about $22 for several weeks, and then dropped to $18 again, analysts would identify $18 as a double bottom. An analyst observing this pattern might conclude that investors were comfortable paying $18 for the stock, and that the price might not drop below that level in the near term. In technical terms, the analyst would say that there was support for the price. However, there’s no guarantee that it might not drop further or hit a new low.
Double top is term that technical analysts use to describe a stock price pattern that, when depicted on a chart, shows two gains to the same dollar level separated by a price drop.For example, if a stock that had been trading about $28 a share rose to $35, dropped back to trade about $28 for several weeks, and then rose to $35 again, analysts would identify $35 as a double top. An analyst observing this pattern might conclude that investors were comfortable paying $35 for the stock, and that the price might not rise above that level in the near term. In technical terms, the analyst would say that there was resistance above that price. However, there’s no way to predict whether the price will in fact remain at $35 or gain value and hit new a high.
Dow Jones 65 Composite Average
This composite of three Dow Jones averages tracks the stock performance of 65 companies in two major market sectors and the benchmark DJIA.Those averages are the Dow Jones Industrial Average (DJIA), the Dow Jones Transportation Average, and the Dow Jones Utility Average.
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average (DJIA), sometimes referred to as the Dow, is the best-known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip US stocks.Though it is called an average, it is actually a price-weighted index. That means the gains and losses of the highest priced stocks are counted more heavily than gains and losses of lower priced stocks.The DJIA is quoted in points, not dollars. It’s computed by totaling the weighted prices of the 30 stocks and dividing by a number that is regularly adjusted for stock splits, spin-offs, and other changes in the stocks being tracked.The companies that make up the DJIA are changed from time to time. For example, in 1999 Microsoft, Intel, SBC Communications, and Home Depot were added and four other companies were dropped. The changes were widely interpreted as a reflection of the emerging or declining impact of a specific company or type of company on the economy as a whole.
Dow Jones Transportation Average
The Dow Jones Transportation Average tracks the performance of the stocks of 20 airlines, railroads, and trucking companies. It is one of the components of the Dow Jones 65 Composite Average.
Dow Jones Utility Average
The Dow Jones Utility Average tracks the performance of the stocks of 15 gas, electric, and power companies, and is one of the components of the Dow Jones 65 Composite Average.
Dow Jones Wilshire 5000 Index
The Dow Jones Wilshire 5000 is a market capitalization weighted index of approximately 7,000 stocks. It is the broadest US stock market index, tracking all the stocks traded on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the Nasdaq Stock Market (Nasdaq), and other US based stocks for which data is readily available. The difference between the index’s name (the 5000) and the number of stocks the index tracks at any one time occurs because the number of stocks being traded changes all the time.
Dow theory maintains that major market trends depend on how the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average behave.They must move simultaneously in the same direction until they both hit a new high or a new low in order for a trend to continue. Some experts discount the relevance of this approach as a useful guideline, arguing that waiting to invest until a trend is confirmed can mean losing out on potential growth.
A down payment is the amount, usually stated as a percentage, of the total cost of a property that you pay in cash as part of a real estate transaction. The down payment is the difference between the selling price and the amount of money you borrow to buy the property. For example, you might make a 10% down payment of $20,000 to buy a home selling for $200,000 and take a $180,000 mortgage. With a conventional mortgage, you’re usually expected to make a down payment of 10% to 20%. But you may qualify for a mortgage that requires a smaller down payment, perhaps as little as 3%. The upside of needing to put down less money is that you may be able to buy sooner. But the downside is that your mortgage payments will be larger and you’ll pay more interest, increasing the cost of buying.
When a security sells at a lower price than its previous sale price, the drop in value is called a downtick. For example, if a stock that had been trading at 25 sells at 24.95 the next time it trades, the 5 cent drop is a downtick.
In simplified terms, a bond’s duration measures the effect that each 1% change in interest rates will have on the bond’s market value. Unlike the maturity date, which tells you when the issuer has promised to repay your principal, duration, which takes the bond’s interest payments into account, helps you to evaluate how volatile the bond’s price will be over time.Basically, the longer the duration — expressed in years — the more volatile the price. So a 1% change in interest rates will have less effect on the price of a bond with a duration of 2 than it will on the price of a bond with a duration of 5.
A Dutch auction opens at the highest price and drops gradually until there’s a buyer willing to pay the amount being asked. The transaction is completed at that price. The only securities auctions in US markets that are conducted as Dutch auctions are the competitive bids for US Treasury bills, notes, and bonds.In contrast, a conventional commercial auction begins with the lowest price, which gradually increases as potential buyers bid against each other. The selling price is determined when no bidder will top the last offer on the table.A double-action auction — the system in place on US stock exchanges — features many buyers and sellers bidding against each other to close a sale at a mutually agreed-upon price.
Last Updated: December 26th, 2014