This glossary of investment and related terms provides simple definitions of terms that you may need to know.

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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

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Debt-to-equity ratio:

Long-term debt divided by stockholders' equity. The ratio identifies the relationship of debt to ownership interest in the firm's financial structure. A measure of financial risk.

Deep discount bond:

A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.

Default risk:

The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.

Defined benefit:

A defined benefit plan is an employer maintained plan that pays out a specific, pre-determined amount to retirees. Defined benefit plans are guaranteed by PBGC.

Defined contribution:

A defined contribution plan does not promise a specific benefit at retirement, but does provide regular, set contributions to a pension fund. Defined contribution plans tend to be less expensive than defined benefit plans.

Deflation:

The increase of purchasing power due to a general decrease in the prices of goods and services.

Depreciation:

Decrease in the value of an investment over time.

Discount bond:

A bond that is valued at less than its face amount.

Discount broker:

A stockbroker who charges a reduced commission and provides no investment advice.

Discount rate:

The interest rate used in discounting future cash flows; also called the "capitalization rate."

Distributions and withdrawals:

When money is withdrawn from a 401(k) plan, the withdrawal is referred to as a distribution. 401(k) plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 70 1/2.

Diversification:

The practice of spreading risk by investing in a number of securities that have different return patterns over time. When one investment is yielding a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns.

Dividend:

Payments by a company to its stockholders. A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary. Dividends to common-stock shareholders may be withheld if business is poor or if the corporation's directors decide to retain earnings to invest in business operations.

Dividend payout ratio:

Annual dividends per share divided by annual earnings per share.

Dividend yield:

Annual dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return.

Dollar-Cost Averaging:

A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased.

Dow Jones Industrial Average (DJIA):

Price-weighted average of 30 actively traded blue-chip stocks, traditionally of industrial companies.

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Earnings multiplier:

An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham's formula relating value to recent earnings and expected earnings growth rates.

Earnings per share:

The net income of the firm divided by the number of common stock shares outstanding.

Earnings yield:

Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.

Employer matching contribution:

The amount, if any, that the employer contributes to the employee's 401(k) account. Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit.

Equity risk premium:

An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.

Equities:

Investments in which the investors obtain a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value. It is another word for stock.

ERISA:

Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of PBGC.

Excess returns:

Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.

Expected return:

The average of a probability distribution of possible returns.

Expense Ratio

The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)1 charges, if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses.

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Face value:

The stated principal amount of a debt instrument.

Fiduciary:

An individual or a trust institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. The relationship between a guardian and his ward, an agent and his principal, an attorney and his client, one partner and another partner, a trustee and a beneficiary, each is an example of fiduciary relationship, See also ERISA Section 3(21)(A).

Fiscal Year

An accounting period consisting of 12 consecutive months.

Fixed-Income Securities:

Investments that represent an IOU from the government or a corporation to the investor and offer specific payments at predetermined times. Public and private bonds, government securities, and the 401(k)'s guaranteed accounts, are fixed-income investments. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal.

401(k) Plan

A tax-deferred retirement plan that can be offered by businesses of any kind. A company's 401(k) plan can be a "cash election" profit-sharing or stock bonus plan, or a salary reduction plan. A 401(k) plan carries many unique advantages for both employer and employee.

403(b) Plan

SECTION 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares.

Fundamental analysis:

This valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.

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