DAX
Index of 30 major German stocks.
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Day order
An investor's order to buy or sell stock that will be canceled by the end of the day if not filled.
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Debenture
A common kind of corporate bond, often issued by a firm during restructuring. Debentures are backed only by the credit quality or essentially the good name of the issuer. Since there is no collateral, these bonds may carry a higher risk, and therefore a higher rate of return, when compared to an asset-backed bond. However, debentures of solid companies may be very highly rated.
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Debt
Securities such as bonds, notes, mortgages and other forms of paper that indicate the intent to repay an amount owed. A company that takes on too much debt can wind up in dire financial straits. See "Long-Term Debt."
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Debt-to-equity ratio
A measure of financial leverage, the debt-to-equity ratio is calculated by dividing long-term debt by shareholders' equity. (Shareholders' equity is the same as book value.) The higher the ratio, the greater the chance a company won't be able to pay its debts in the future. See "Long-Term Debt."
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Debt-to-total-capital ratio
This ratio indicates how much financial leverage a company has. It is calculated by dividing total debt by total invested capital. Total invested capital is a tally of all the outside investments a company's management has used to finance its business — everything from equity (the amount of stock sold) to long-term debt. The major difference between the debt-to-equity ratio and this ratio is that debt-to-capital includes long-term debt as part of the denominator. The higher the ratio, the greater the chance a company will not be able to pay its debts in the future. See "Long-Term Debt."
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Deductible
Under an insurance policy, the amount of loss or expense that you must shoulder yourself before the insurance company begins paying.
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Default
Failure to pay principal or interest on a debt security. Owners of a bond that is in default can usually make claims against the assets of the issuer to recover their loss. A bond that is in default is rated D by Standard & Poor's. A default generally does not mean that the investor loses his or her entire investment. Sometimes the default will be the result of a temporary cash crunch and won't result in a bankruptcy filing. In other cases, a company will enter bankruptcy and either liquidate or reorganize its capital structure and business operations. In either case, the bond investor will generally recover some percentage of the bond's face value. See "How Bonds Behave."
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Defensive securities
Stocks with investment returns that do not tend to decline as much as the market in general in times when stock prices are falling. These include companies with earnings that tend to grow despite the business cycle, such as food and drug firms, or companies that pay relatively high dividends like utilities.
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Defined-benefit plan
A defined-benefit plan is a traditional pension plan usually paid for by your employer. Upon retirement, you receive a fixed monthly check based on your age, salary and length of service. Unlike a 401(k) or other defined contribution plans, it does not necessarily require you to contribute any portion of your salary to receive a retirement benefit.
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Defined-contribution plan
A pension plan in which the level of contributions is fixed at a certain level, while benefits vary depending on the return from the investments. In some cases such as 401(k), 403(b) and 457 plans, employees make voluntary contributions into a tax-deferred account, which may or may not be matched by an employer. Defined contribution plans, unlike defined benefit plans, give the employee options where to invest the account, usually among stock, bond and money-market mutual funds.
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Deflation
A decline in the general price level of goods and services that results in increased purchasing power of money. The opposite of inflation. Deflation is not always good for an economy because companies have no pricing power.
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Delta
A measure of the relationship between an option price and its underlying futures contract or stock price.
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Demand-pull inflation
A general increase in prices that occurs when demand exceeds supply.
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Depreciation
A noncash charge that represents a reduction in the value of assets due to wear, age, or obsolescence. Hard assets such as factories and machinery depreciate in value over time and must eventually be replaced. Accountants write-off these depreciation costs over the estimated useful life of the asset. Because of the reductive effects of depreciation on earnings, some financial analysts prefer to look at cash flow, which backs out depreciation costs from net income
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Depression
A severe downturn in an economy that is marked by falling prices, reduced purchasing power and high unemployment. The Great Depression began in 1929 and continued through most of the 1930s. But even depressions haven't stopped the upward trend of stock prices and earnings. See "The Odds Are in Your Favor."
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Derivative
A derivative is a security whose value is "derived" from the performance or movement of another financial security, index or other investment. For example, derivatives may be futures, options or mortgage-backed securities. Derivatives may be used to short sell a security or to hedge against downside risk.
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Derivative suit
A shareholders' suit made on behalf of the company or mutual fund and its shareholders. If damages are awarded, they are paid to the company or mutual fund. Originally, derivative suits were a way for shareholders to challenge the actions of a self-interested or entrenched board that allowed mismanagement of a company.
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Devaluation
Lowering of the value of a country's currency relative to the currencies of other nations. When a nation devalues its currency, the goods it imports become more expensive, while its exports become less expensive abroad and thus more competitive.
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DIF score
A rating, arrived at with a secret formula, used by the Internal Revenue Service to help figure out which returns to select for audits. DIF stands for "discriminant function."
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Dip
A slight decline in securities prices followed by a rise. Analysts often advise investors to buy on the dips, meaning buy when a price is momentarily weak.
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Disability insurance
Insurance that can replace part of your income if illness or injury leaves you unable to work for an extended period.
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Disability-waiver-of-premium rider
In life insurance, an added policy provision that continues coverage, without requiring premium payments, if the policyholder becomes disabled.
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Disclaimer trust
A trust designed for couples who do not yet have enough assets to need a credit-shelter trust. A disclaimer trust allows the surviving spouse to disclaim up to $600,000 of the estate and have those assets put into a credit-shelter trust.
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Discount
When the market price of a closed-end fund is less than its underlying net asset value (NAV), it is said to be trading at a discount. That discount allows you to buy a dollar's worth of securities for less than a dollar. So if a closed-end fund trading at a 10% discount owns a portfolio of stocks collectively worth $10 a share, you can buy that portfolio for $9 a share. Unlike open-end funds, closed-ends trade like stocks on an exchange so a fund's price is determined by investor demand for its shares. A lack of demand can cause the fund's market price to be less than its underlying portfolio value—the source of the discount. See "Closed or Open End."
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Discount bond
One that sells at a current market price that is less than its face value. Bonds sell at a discount when the coupon on the bond is lower than prevailing rates. For example, you might have to pay only $812 for a bond with a 6.5% coupon if new issues yielding 8% are available for $1,000. See "When Yield Goes up, Price Goes Down."
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Discount brokers
Brokers who charge lower commissions than full-service brokers. Investors often give up the benefits of stock-picking advice, updates on news affecting their investments and research services normally provided by full-service brokers. Increasingly, however, the line between discount and full-service brokers has begun to blur. See "Power to the People."
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Discount rate
The interest rate the Federal Reserve charges its member banks for loans. This rate influences the rates these financial institutions then charge to their customers. The Fed uses this rate as one method of influencing monetary policy. The rate is also very important to the bond and stock markets as it provides a clue to interest rate trends and future Federal Reserve policy. See federal-funds rate.
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Disinflation
A slowdown in the rate of price increases. Disinflation occurs during a recession, when sales drop and retailers are unable to pass higher prices along to consumers.
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Disintermediation
The movement of funds from low-yielding accounts like savings accounts into higher yielding investments like debt securities.
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Disposable income
The income that a person retains after taxes. Disposable income can be saved or used to purchase goods and services.
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Diversification
When you diversify, you spread your money among a slew of different securities, thereby avoiding the risk that your portfolio will be badly bloodied because a single security or a particular market sector turns sour. If you've got the time and energy, you can create your own diversified portfolio. But it'll mean keeping track of at least 20 different stocks or bonds at once closed-end fund's a daunting task, to say the least. A much easier solution is to buy a range of mutual funds and leave the diversification worries up to professional management. See "Defense Is The Best Offense."
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Dividends
A portion of a company's net income paid to stockholders as a return on their investment. A stock's dividend yield is determined by dividing a company's annual dividend by its current share price. So a stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%. Dividends are declared or suspended at the discretion of the company's board of directors. A prime benefit of dividends is that once paid, they are money in the bank and provide your only return when stocks are weak. One disadvantage is that dividends are taxed as ordinary income, which, if you're in a high tax bracket, can ramp up your tax bill. See "Dividend/Yield."
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Dividend yield
A company's annual dividend expressed as a percentage of its current stock price. As a stock's price declines, its dividend yield goes up. So a stock selling for $20 a share with an annual dividend of $1 a share yields an investor 5%. But if the same stock falls to $10 a share, its $1 annual dividend yields 10%. Value investors often see high dividend yields as a sign that a stock is cheaply priced. A high yield also acts as a cushion in a declining market, which is attractive to risk averse investors. The downside is that dividends are taxed as ordinary income. The greater the yield, the more taxes you will have to pay. See "Dividend/Yield."
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Dodge construction-contracts index
A monthly report on the value of new construction contracts. The index, adjusted to reflect seasonal variations in construction contracting, gauges total monthly and year-to-date dollar volume in the U.S. in three categories: nonresidential, residential and nonbuilding. It is issued by F.W. Dodge, a unit of McGraw-Hill.
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Dollar-cost averaging
A strategy to invest fixed amounts of money in securities at regular intervals, regardless of the markets' movements. Dollar-cost averaging is another form of diversification — only instead of spreading your money over a bunch of different stocks or bonds, it diversifies your investments over time. As a result, when the price is lower, more shares of the security are purchased than when prices are higher. $300 invested into the same stock every month will get you a lot more shares when the stock is depressed than when it's flying high. This strategy causes your overall cost of investment to go down. See "Defense Is the Best Offense."
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Dow Jones averages
There are four Dow Jones averages that track price changes in various sectors. The Dow Jones Industrial Average tracks the price changes of the stock of 30 industrial companies. The Dow Jones Transportation Average monitors the price changes of the stocks of 20 airlines, railroads and trucking companies. The Dow Jones Utility Average measures the performance of the stock of 15 gas, electric and power companies. The Dow Jones 65 Composite Average monitors the stock of all 65 companies that make up the other three averages. One consistent criticism of the averages is that they're price-weighted, not market-capitalization weighted like the S&P 500. Since each Dow index calculates the average price of its participants, higher priced stocks have a greater influence on index movements than lower-priced stocks. But a stock's price is less significant to the broader market than its market capitalization.
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Dow Jones Equity Market Index
Index that measures price changes in more than 100 U.S. industry groups. The stocks in the index represent about 80% of U.S. market capitalization and trade on the New York Stock Exchange, the American Stock Exchange and the Nasdaq Stock Market. The equity-market index is market-capitalization weighted, which means that a stock's influence on the index is proportionate to its size in the market.
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Dow Jones Global Indexes
Some 2,700 companies' stocks in 29 countries world-wide are tracked by Dow Jones Global Indexes. These indexes subdivide the companies by geographic region and industry group. Collectively, the indexes represent more than 80% of the equity capital on stock markets around the world. All of them are weighted by market capitalization, which is the product of price times shares outstanding. Thus, each country carries a weight proportionate to the relative value of its equities to all those in the world. The U.S. market is the world's biggest, and the U.S. component of the global indexes has the most stocks — more than 700.
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Dow Jones Industrial Average
Often referred to as the Dow or DJIA, the Dow Jones Industrial Average is the best known and most widely reported indicator of the stock market's performance. The Dow tracks the price changes of 30 large blue-chip stocks. Their combined market value is equal to roughly 20% of the market value of all stocks listed on the New York Stock Exchange (NYSE). That said, the Dow is frequently criticized for lacking the breadth of the S&P 500, which accounts for more than 80% of NYSE's market value. It is also a price-weighted index, weighting higher priced stocks more than lower priced ones. The S&P 500 is market-capitalization weighted index, weighting the total market value of each stock's shares. Some financial analysts believe a market-cap weighted index paints a more accurate picture of the stock market.
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Dow Jones World Stock Index
An index that measures the performance of more than 2,000 companies world-wide that represent more than 80% of the equity capital on 25 stock markets. It is a composite of the Dow Jones Global Indexes.
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Downtick
A sale of a listed security that occurs at a lower price than the previous transaction.
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Draft
A signed, written order by one party that instructs another party to pay a third party a specific amount. It also may be called a bill of exchange.
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Drag on returns (drag grade)
The negative impact of three factors — sales charges, annual expenses and portfolio turnover — on mutual fund returns. High turnover funds can lead to large capital gains distributions and tax inefficiency. If you aren't careful, management expenses, and capital gains taxes can shave hundreds — if not thousands — of dollars from your returns over the years. For more, see "Cost Control."
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Durable goods orders
The durable goods orders data measure the number of new orders for goods intended to last at least three years placed with domestic manufacturers for immediate and future delivery. The financial markets view this report as an excellent indicator of manufacturing sector trends. It is provided by the Census Bureau and U.S. Department of Commerce near the end of each month for the prior month's orders. The report is divided into broad categories, including defense, nondefense, capital and noncapital goods. See leading indicators.
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Durable power of attorney
This document allows someone to conduct your personal and financial affairs even if you become legally incompetent. A power of attorney expires upon the giver's death.
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Duration
A way to measure part of the risk in a bond or bond fund. Duration tells you how long it will take to recoup your principal. It's a complicated calculation, so you'll have to get the number from your fund company or bond dealer, but it makes for a handy way to judge interest rate risk. If a bond or a bond fund has a duration of seven years, a 1% drop in interest rates will raise its value by 7%, while a 1% rise in interest rates will lower its price by 7%. The greater the duration of a bond, the greater its percentage volatility. In general, duration rises with maturity and falls with the frequency of coupon payments. See "Bond Funds."
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Dutch auction
A procedure for buying and selling securities named for a system used for flower auctions in Holland. A seller seeks bids within a specified price range, usually for a large block of stock or bonds. After evaluating the range of bid prices received, the seller accepts the lowest price that will allow it to dispose of the entire block. U.S. Treasury bills are sold under this system.
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