Glossary of Investment Terms (D - G)

This glossary offers a handy reference for some of the more common investment and financial terms.  The information presented here covers topics that are subject to change due to legal and regulatory actions.  Readers should consult with their legal, tax or financial advisors before entering into any agreement or effecting any transactions involving terms or concepts about whose meaning they may be unsure.

D

Day order. An order to buy or sell that, if not executed, expires at the end of trading day on which it was entered.

Dead-cat bounce.  When prices for a market or an individual security experience a rapid and significant decline, the price often recovers a portion of the decline before resuming the decline or settling into a lower trading range.

Dealer. An individual or firm in the securities business who buys and sells stocks and bonds as a principal rather than as an agent. The dealer's profit or loss is the difference between the price paid and the price received for the same security. The dealer's confirmation must disclose to the customer that the dealer has acted as a principal in the trade. The same individual or firm may function, at different times, either as a broker or dealer.

Debenture. A promissory note backed by the general credit of a company and usually not secured by a mortgage or lien on any specific property.

Debit balance. In a customer's margin account, that portion of the purchase price of stock, bonds or commodities that is covered by credit extended by the broker to the margin customer.

Deflator.  Statistical factor used to adjust the impact of inflation over time.

Delayed opening. The postponement of trading of an issue on a stock exchange beyond the normal opening of a day's trading because of market conditions that have been judged by exchange officials to warrant such a delay. Typical reasons for a delay include an imbalance of buyers and sellers, and pending corporate news that may be expected to have a significant influence on market prices.

Depletion accounting.  Depletion is an accounting practice used to handle the draw-down by a business of a pool of natural resources (e.g., metals, oil, gas and timber) that conceivably can be reduced to zero over time. Depletion charges are reductions to earnings based upon the amount of the asset taken out of the total reserves in the period for which accounting is made.  These are bookkeeping entries which do not represent any cash outlay.

Depository Trust Company (DTC). A central securities certificate depository through which members effect security deliveries between each other via computerized bookkeeping entries, thereby reducing the physical movement of stock certificates.

Derivatives.  Products, instruments, or securities whose value or terms are derived from another security. Many derivatives, such as futures and options, are traded on specialized and regulated exchanges, and can be bought freely by investors.  But there are also many forms of derivatives that are unregulated, private contracts between financial institutions or other parties.

Discount. The amount by which a bond or a preferred stock sells below its par value.  Also used as a verb meaning to "take into account" future events.  For example, when a stock price falls in expectation of a dividend cut, the market is said to have “discounted” the dividend cut.

Discounted cash flow.  A method of evaluating an investment by estimating future cash flows and taking into consideration the time value of money.

Discretionary account. An account in which a customer gives an investment advisor or someone else discretion to buy and sell securities, including their selection, timing, amount, and price to be paid/received.

Diversification. Spreading investments among different securities, sectors, or asset classes.

Dividend.  A payment designated by the board of directors to be distributed pro rata among the shares outstanding.  For preferred shares, it is generally an amount fixed at the time of issuance. On common shares, the dividend varies with the fortunes of the company and the amount of cash on hand, and may be omitted if business is poor or the directors decide to retain earnings for investment in the business. Sometimes a company will pay a dividend out of past earnings even if it is not currently operating at a profit.

Dividend Reinvestment Plan (DRIP).  A program in which a dividend paying company will automatically reinvest an investor's dividend to purchase additional shares of the company's stock. The dividend is still taxable by the IRS. In participating in a DRIP, investors use dollar-cost-averaging to increase their amount of capital in the stock.

Dollar-cost-averaging. A system of investing at regular intervals by buying a fixed dollar amount of securities as opposed to a certain number of shares. If each investment equals the same number of dollars, more shares are bought when the price is low, and fewer when it is higher. Thus, the investor benefits from temporary price dips as long as they continue regular  purchases. Dollar-cost-averaging does not assure a profit and does not protect against loss in declining markets.

Down tick.  A term used to designate a transaction made at a price lower than the preceding transaction.

E

EAFE. The Morgan Stanley Capital International EAFE Index is a market capitalization weighted index composed of companies representing the markets of 21 developed market countries in Europe, Australasia and the Far East.

Efficient market theory.  A theory that holds that all investors' knowledge and expectations are already reflected in the price of the market and of individual stocks, with the corollary being that it is extremely difficult to consistently outperform the market over time. The theory also suggests that if investors randomly select stocks from a newspaper's stock listings, they would have as good a chance of outperforming the market as any professional investor.

Equipment trust certificate. A type of security generally issued by a railroad to finance new equipment. Title to the equipment is held by a trustee until the notes are paid off. An equipment trust certificate is usually secured by a first claim on the equipment.

Equity options. Securities that give the holder the right, but not the obligation, to buy (call) or sell (put) a specific number of shares, at a specific price for a specific time period. Usually, one option contract is for 100 shares. Options may be for individual stocks, or they may be tied to stock market indexes such as the S&P 500 or the Nasdaq 100.

Euro. The European currency developed with the goal of helping to unite the economies of Western Europe and to potentially compete with the U.S. dollar as a reserve currency. The euro was launched strictly for interbank transactions in January, 1999, and expanded to full use in January, 2002.

Eurodollar. Not to be confused with the Euro currency, eurodollars are U.S. dollar time deposits (much like CDs) that are held in overseas banks, mostly in Europe. These deposits are so large and so actively traded that the Chicago Board of Trade has created futures contracts for institutions and investors that want to trade in eurodollars.  These contracts have become one of the most actively traded instruments in the world.

Ex-dividend.  The status of a stock of a company that has recently declared a dividend which has not yet been paid.  The buyer of a stock trading ex-dividend (literally "without dividend") does not receive the recently declared dividend. When stocks go ex-dividend, the stock tables include the symbol "x" following the name.

Ex-rights.  Corporations raising additional money may do so by offering stockholders the right to subscribe to new or additional stock, usually at a discount from the prevailing market price. The buyer of a stock selling ex-rights (“without the rights”) is not entitled to the rights.

Exercise Price.  Dollar value per share at which the underlying security in an option contract can be exercised during the specified option period. For call options, the underlying security is bought on exercise, and for put options, it is sold on exercise.

Extraordinary item.  An irregular event, such as a division write-off or acquisition of another company, that needs to be explained to shareholders in an annual or quarterly report. Earnings will normally be calculated and reported both with the inclusion, and with the exclusion, of extraordinary items.

F

Face value. The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuing company. Face value, sometimes referred to as par value, is ordinarily the amount the issuing company promises to pay at maturity. Face value is not an indication of market value.

Federal National Mortgage Association (FNMA).  A government-sponsored corporation that purchases mortgages from lenders, repackages them and sells them. The agency, known as Fannie Mae, deals in both government-backed and conventional mortgages.

Fiduciary.  Person, company, or association entrusted with the control of assets for the benefit of another, known as the beneficiary. Most states have laws governing the conduct of fiduciaries. Some states maintain a list of securities, known as the legal list, which are permissible investments for fiduciaries acting on behalf of their beneficiaries. Other states simply use the Prudent Man Rule which requires that fiduciaries act as a prudent man or woman would with regard to how they invest on behalf of their beneficiary. In addition, the document appointing the fiduciary will establish parameters and guidelines for their activities with respect to the beneficiary's assets. Some examples of fiduciaries are executors of wills, administrators of estates, receivers in bankruptcy, trustees, and custodians for minors.

Fiscal year. Most companies operate on a calendar year basis. Due to the nature of their business, some companies end their accounting on a date other than December 31. For example, a department store may end their accounting year on January 31 because December 31 does not allow enough time to close its books after the Christmas rush.

Fixed charges. A company's fixed expenses, such as bond interest, which it has agreed to pay whether or not it has earned sufficient profit with which to do so, and which are deducted from income before earnings are computed.

Fixed income investment.  A security that pays a fixed rate of return, such as a bond or preferred stock. Fixed income investments offer protection against market risk, but do not protect holders against the risk of inflation.

Flat income bond. This term means that the price at which a bond is traded includes consideration for interest that has accrued but not been paid. Bonds that are in default of interest or principal are traded flat. Income bonds that pay interest only to the extent earned are usually traded flat. All other bonds are usually traded "and interest," which means that the buyer pays to the seller the market price plus interest accrued since the last payment date.

Floor broker. A member of the stock exchange who executes orders on the floor of the Exchange to buy or sell any listed securities.

FTSE. The FTSE 100 Index is an index of the 100 largest companies (by market capitalization) in the United Kingdom.

Fundamental research. Analysis of companies and their stocks based on such factors as sales, assets, earnings, products or services, markets and management.  Often contrasted with technical analysis which emphasizes patterns of changes in the price and trading volume of securities.

Futures contract.  A contract to buy or sell a specified amount of a commodity or financial instrument at a particular price on an agreed upon date in the future. Futures differ from options in that the holder of an option has a choice whether or not to exercise the option, but the parties involved in a futures contract are obligated to complete the transaction.

G

GAAP (Generally Accepted Accounting Principles).  Detailed accounting rules and procedures established by the Accounting Principles Board and now maintained by the Financial Accounting Standards Board (FASB), a self-regulatory organization.

General mortgage bond. A bond that is secured by a blanket mortgage on the company's property but may be outranked by one or more other mortgages.

General Obligation Bond.  Commonly abbreviated as "GO" bond, it is a municipal bond secured by the "full faith and credit" of the issuer. In comparison to revenue bonds that are repaid from a specific revenue source that has been built with the borrowed funds (e.g., a sewer system), a GO bond is repaid with general revenue and borrowings.

GNMA (Government National Mortgage Association). A government-owned corporation nicknamed Ginnie Mae that is an agency of the Department of Housing and Urban Development. Ginnie Mae’s are pools of residential mortgages. GNMA guarantees, with the full faith and credit of the U.S. government, that investors will receive full and timely principal and interest payments even if mortgages in the pool are not paid on a timely basis.

Gold fix. The setting of the price of gold by dealers (especially in a twice-daily London meeting at the central bank).  The gold fix is the fundamental worldwide price used for gold bullion and gold-related contracts.

Good 'til canceled (GTC) order. An order to buy or sell that remains in effect until it is either executed or canceled.

Government agency securities.  Also called "agency securities," these are securities issued by U.S. government agencies such as the Federal National Mortgage Association. Although agency securities have high credit ratings, they are not government obligations and are not directly backed by the full faith and credit of the U.S. government.

Greenmail.  An act of buying a corporation's stock, threatening to take control, and then demanding that those shares be purchased back by the corporation, usually at a price higher than can be obtained on the open market. In exchange, the acquirer agrees not to proceed with a takeover bid.

Growth stock.  Stock of a company with earnings' growth that is anticipated to continue at a high level. Growth stocks are riskier investments than average stocks, however, because they generally have higher price/earnings ratios and make little or no dividend payments to shareholders.