Glossary

Learn & be a stock guru...

The financial world has developed a special investment-oriented language to help describe the stock market, investments, securities for the stock market, stock market analysis, and its conditions. At times you may be confronted with a term which is totally alien or has a completely different meaning from what you thought. Misunderstanding these terms can sometimes lead to the wrong conclusion, and that can cost you money!

What you don't know can hurt you.

Daily Volume

Daily volume is one indicator of how liquid a security is. A low daily volume could imply low interest in a stock, a limited float (number of shares outstanding) and/or a highly volatile share price, since even relatively small trades will have an exaggerated effect. Low-volume stocks, also known as thinly traded, generally are seen as riskier than more heavily traded shares. Pay special attention to changes in volume; a sudden increase may mean news about the company has just been issued -- or is foreseen by those in the know.

Day's High

The highest price of the security during the current day's trading. By checking this in relation to the low, you can get an idea of how much the stock is fluctuating

Day's Low

The lowest price of the security during the current day's trading. By comparing to the high, you can get an idea of how much the stock is fluctuating.

Debenture

A bond issued without specific security. In the event of a crisis, holders of debentures take a back seat to other bondholders. To compensate for the added risk, debentures usually pay higher interest than secured bonds, or offer conversion to common stock

Debit Spread

A strategy where the investor buys a call (put) and sells a further out-of-the-money call (put) to create a spread with an initial debit in the investor's account. This is a conservative approach to trading options as it limits both the risk and reward relative to a straight option purchase.

Debt guidelines

In home buying, income or debt guidelines estimate the size of the loan you can get. When you're ready to pass the muster of loan officers, you may later pre-apply for a loan, locking in the interest rate and other terms pending final loan approval.

Debt Ratio

Liabilities divided by assets. The debt ratio is a good indicator of the extent to which a business is leveraged. The lower this number, the more conservative the firm and the less likely it is to be knocked for a loop in hard times. On the other hand, the judicious use of leverage can result in a higher return on assets -- in other words, increased profitability. Like so many ratios, this one varies depending on the industry a company is in. Generally, however, the debt of industrial firms should not exceed roughly two-thirds of equity, or a debt ratio of about 65 percent. This ratio tends to be higher in the transportation and utility industries

Debt Securities

Any security that represents borrowed funds. Bonds are the classic debt securities, and often the loan represented by the bond is secured by the assets of the borrower. Thus, in the event things go sour, the bondholders' claim on assets takes precedence over the stockholders' claim

Debt/Equity Ratio

The most recent quarter long-term debt divided by the most recent quarter common stock equity. The debt/equity ratio is a measure of the extent to which a firm's capital is provided by owners or lenders. Aggressive companies often rely more heavily on debt than conservative companies. A greater reliance on debt can mean greater profitability for shareholders, but also greater risk in the event things go sour. Generally the debt/equity ratio should be 30% or lower, but as with most ratios, this one varies by industry. Companies in industries that aren't very competitive or are subject to tight regulation can afford to carry more debt, as can companies whose markets tend to be reliable. Food makers, for instance, know that people have to eat. But even here, there are caveats.

Decrease/Increase in Other Current Liabilities

The change over time of the ""other current assets,"" a category that includes all other current liabilities that do not fit into short-term debt

Decrease/Increase in Payables

The change over time in accounts payable.

Deferred Income Taxes

A liability arising from the difference between regular accounting and tax accounting. Companies want to show investors the highest possible earnings, but when it comes to the Central Board of Revenue, the idea is to show as little income as possible. Thus, firms can legally choose a depreciation technique that maximizes income for their own accounting and a second technique that minimizes it for the Central Board of Revenue. But in doing so, a company must acknowledge and account for future taxes due, which is the reason for an item called deferred income taxes.

Deferred Sales Charge

A fee charged when you sell mutual fund shares, instead of when you buy them. Also known as a back- end load, these deferred charges typically go down each year you hold the fund, until eventually they reach zero. Deferred sales charges give investors an incentive to buy and hold, as well as a way to avoid some sales charges, but note that 12b-1 fees (if any) and management expenses would continue to be levied

Depreciation and Amortization

A non-cash charge that reduces the value of fixed assets due to wear, age or obsolescence. This figure also includes amortization of leased property, intangibles, goodwill, and depletion.

When a company buys a new machine, for instance, it must account for this item as an asset to be depreciated, or written down, over time, rather than accounting for this purchase as an expense akin to, say, payroll. Conservative companies depreciate things as quickly as possible, even though depreciation charges reduce reported net income, and savvy investors are on the lookout for firms that play fast and loose in this gray area (how fast should a motion picture be amortized, for instance?). On the other hand, depreciation has only a limited relationship to reality. Lots of perfectly good assets are fully depreciated, and some items that are depreciated may actually be gaining in value. Depreciation and amortization have the advantage of reducing net income for tax purposes.

Derivative Instrument

Generically, derivatives are investments that are ""derived"" from something else. Options are derivatives, for instance, because the option has an underlying stock, commodity or other asset on which its price is based. Lately, however, the term derivatives has been used to describe highly complex financial instruments that have led to losses for some businesses and local governments, some of whom either didn't know what they were doing or found themselves with a rogue employee.

Difference in Earnings

The difference in Earnings Per Share (EPS) between what analysts were predicting for the company and what the company actually reported.

Direct Purchase Plan

A direct purchase plan (DPP) allows you to buy stock directly from the company itself, without paying a broker's sales commission.

Diversification

An investing strategy that seeks to minimize risk by diversifying among many types of investments. Diversification and risk are directly related to each other because the more you diversify your portfolio, the less risk you have.

To illustrate, say all of your money was wrapped up in the stock of one particular company -- XYZ Corp., the largest automobile maker in the world. This would be a risky proposition for three main reasons. First, the value of XYZ's stock could be adversely effected by weakness in the overall stock market. Second, the value of the stock could suffer if the automobile industry as a whole falls onto hard times. And finally, even if both the stock market and the industry are doing great, the value of XYZ Corp.'s stock could tumble for a variety of other reasons unique to the company such as an unexpected shutdown of its plants, the loss of a key customer, or even the death of one of its key executives.

If you instead had a little of your money in XYZ Corp.'s stock, a little money in a diversified mutual fund that owns several stocks, a little money in bonds and a little in real estate, the chances of your portfolio plunging suddenly would be greatly reduced.

Diversified Emerging Markets

Of course, you probably already learned this lesson when your mother told you, "Never put all your eggs in one basket". These funds have the potential to significantly appreciate in value, but they also can suffer big losses.

Dividend

The distribution of corporate earnings to shareholders.

Usually paid quarterly, dividends give shareholders a piece of the action right now, rather than rewarding owners only when they sell (and perhaps not even then). But not all companies pay dividends, and frankly, dividends aren't always desirable. Fast-growing smaller companies typically don't pay dividends, for instance, which is often fine with investors, who may not want any more taxable income now, and who believe the company can make those earnings grow more effectively anyway. (Dividends are taxable as ordinary income, a higher rate than capital gains, and must be put to work somehow elsewhere.)

Dividends typically are paid by larger, more established firms, but some industries pay more than others.

Dividend Coverage

A comparison of earnings and dividend payout to see whether the company has enough money coming in to cover what goes out to shareholders. Dividend coverage should be ample; a company earning barely enough to cover its dividend, or even less than the dividend it pays, will sooner or later have to cut its dividend. At the very least, dividend increases are impossible, and management's flexibility with respect to reinvestment and other issues is limited.

Dividend Growth

The compound annual growth rate of dividends per share.

Dividend Rate

The annual ruppee amount of the dividend per share.

Dividend Reinvestment Plan

A system whereby dividends on a stock are automatically reinvested in additional shares of stock, usually without fee and sometimes even at a discount.

Also known as DRIPs, dividend reinvestment plans are justly popular with investors. For one thing, they solve the problem of how to reinvest dividends, which are typically paid in cash. For another, they offer a way to increase your stock holdings at minimal expense and effort.

Dividend Yield

A stock's dividend expressed as a percentage of the share price. A high dividend yield can be an indication that a stock is undervalued -- or it can imply that a dividend cut is in the offing.

Dividend Yield (5-year average)

The sum of the past five fiscal year-end dividend yields divided by 5

Dividends Paid per Share

The cash payment per share made by the company to its shareholders. Payment is usually made quarterly.

Double Bottom

For technicians, this is when a stock falls, bounces back, falls again to the same level and then rebounds once more. The twice-touched low is considered a support level. The graph of this phenomenon is vaguely like a W.

Double Top

For technicians, the term used to describe what happens when a stock tests a given high level twice. This level is considered something of a ceiling. The graph of this phenomenon is vaguely like an M.