Jargon Buster
Are you puzzled by investment language?
Our jargon buster gives clear and concise definitions and explanations of investment terminology.
To view the definitions please select the relevant letter below. Or alternatively search to find the definition and explanation you are looking for.
Dealer
An individual or firm that acts as an intermediary between buyers and sellers. The dealer might also buy securities to sell for a profit
Debenture
In the UK this is a bond secured by a prior claim on the assets of the issuer or, in some circumstances, by specific assets of the issuer. A debenture holder is entitled to appoint a receiver if necessary
Debt/Equity ratio
A company"s borrowings divided by the market value of its equity. It is a measure of the amount of gearing of a company, and an indicator of financial strength
Default
Can be a) the failure to pay interest or principal promptly when due, or b) the failure to meet payments on a futures contract as required by an exchange
Default risk
The risk that an issuer will not be able to make future interest (coupon) or capital (principal) payments. Bonds issued by the governments of most developed countries are generally regarded as having an extremely low default risk (AAA).
Defensive
An investment strategy is "defensive" if it is designed to have a low level of risk (and probably will therefore also have a low expected return)
Defensive stock
A stock which is expected to be relatively insensitive to market or economic downturn, for example a food manufacturer
Deflation
Negative inflation, i.e. falling prices
Depression
A period of strongly negative economic growth and falling prices
Derivative
A financial instrument such as a future or option whose payoffs (and ultimately value) are derived from the value of another (underlying) asset
Devaluation
The formal reduction in the value of a currency against other currencies. This is opposed to depreciation, which is the reduction in the value of a currency through market movements
Dilution
A reduction in earnings per share and book value per share due to an increase in the number of shares issued. This can occur if convertible securities are converted or warrants or employee stock options are exercised
Dirty fees
Fund management fees to which "extras" (often not explicit) are added, e.g. for custody, overseas transactions etc
Discount rate
The rate of interest used to find the present value of a future cash flow
Discounted cash flow (DCF)
The process by which future cash flows (for example, dividends or interest payments) are adjusted to allow for the time value of money to arrive at a value in today"s terms
Discretionary client
A client who gives an investment manager total authority to manage the assets against a specified benchmark. The manager has the authority to make decisions as if he was the beneficial owner
Disinflation
A reduction in the rate of inflation
Diversification
Holding a range of assets to reduce risk
Dividend
The portion of company net profits paid out to equity investors
Dividend discount model
A model used to estimate a security"s value by adding all discounted future dividends of a company
Dividend yield
The annual dividend on a share divided by the share price
Downgrade
When a bond"s credit rating is lowered. This might be caused by an event such as a negative trading statement by the issuer, which in turn increases the risk that the issuer might be unable to meet its future payment obligations. If the downgrade reduces an issuer"s credit rating to high yield status funds which only invest in investment grade bonds may need to sell the bond
Drawdown
Known also as income drawdown/ withdrawal or unsecured pension, it allows members below 75 to continue investing in their funds, whilst drawing a limited proportion as income
Due diligence
A detailed examination of information not all publicly available prior to a transaction e.g. an acquisition of one company by another
Duration
The (Macaulay) duration is a measure of the average time until a bond"s cash flows occur, and of the sensitivity of its price to interest rate changes Technically speaking, the Macaulay Duration is the sum of the time weighted discounted payments (coupons and principal) of a bond. Another way to think about duration is the average time period over which you will receive your payments. Hence, if two bonds have the same maturity, the bond with the higher coupon will have a shorter duration (the average time of repayment is less heavily weighted to the repayment of capital (principal) at maturity)
Jargon Buster is intended to assist in the understanding of some of the many technical terms that frequently appear in the pensions world. The definitions are intended as a guide only.
Jargon Buster is provided by Blackrock for visitors to www.napf.co.uk