A deferred annuity contract allows you to accumulate tax-deferred earnings during the term of the contract and sometimes add assets to your contract over time. In contrast, an immediate annuity starts paying you income right after you buy.
DEED
Your deferred annuity earnings can be either fixed or variable, depending on the way your money is invested.
Deferred annuities are designed primarily as retirement savings accounts, so you may owe a penalty if you withdraw principal, earnings, or both before you reach age 59½.
Defined benefit plan
A defined benefit plan—popularly known as a pension—provides a specific benefit for retired employees, either as a lump sum or as income for the rest of their lives. Sometimes the employee’s spouse receives the benefit for life as well.
The pension amount usually depends on the employee’s age at retirement, final salary, and the number of years on the job. All the details are spelled out in the plan.
However, an employer may end its defined benefit plan or replace this traditional source of retirement income with defined contribution or cash balance plans.
Defined contribution plan
In a defined contribution retirement plan, the benefits—that is, what you can expect to accumulate and ultimately withdraw from the plan—are not pre- determined, as they are with a defined benefit plan.
Instead, the retirement income you receive will depend on how much is contributed to the plan, how it is invested, and what the return on the investment is.
One advantage of defined contribution plans, such as 401(k)s, 403(b)s, 457s, and profit-sharing plans, is that you often have some control over how your retirement dollars are invested. Your choice may include stock or bond mutual funds, annuities, guaranteed investment contracts (GICs), company stock, cash equivalents, or a combination of these choices.
An added benefit is that, if you switch jobs, you can take your accumulated retirement assets with you, either rolling them into an IRA or a new employer’s plan if the plan accepts transfers.
Deflation
Deflation, the opposite of inflation, is a gradual drop in the cost of goods and services, usually caused by a surplus of goods and a shortage of cash.
Although deflation seems to increase your buying power in its early stages, it is generally considered a negative economic trend. That’s because it is typically accom- panied by rising unemployment, falling production, and limited investment.
Delivery date
The delivery date, also known as the settlement date, is the day on which a stock, option, or bond trade must be settled, or finalized.
For stocks, the delivery date is three business days after the trade date, or T + 3. For listed options and government securities, it’s one day after the trade date, or T + 1.
If you’re the seller, your brokerage firm must turn over the security by the delivery date or transfer the record of ownership to the account of another of its clients who has purchased the security. That process is called netting.
If you’re the buyer, you must provide payment by the delivery date so that the transaction can be finalized. You may pay through a margin or money market account with the brokerage firm, by check or electronic transfer, or by instructing your broker to sell other investments.
Delta
The relationship between an option’s price and the price of the underlying stock or futures contract is called its delta.
If the delta is 1, for example, the relationship of the prices is 1 to 1. That means there’s a $1 change in the option price for every $1 change in the price of the underlying instrument.
With a call option, an increase in the price of an underlying instrument typically results in an increase in the price of the option. An increase in a put option’s price is usually triggered by a decrease in the price of the underlying instrument, since investors buy put options expecting its price to fall.
Department of Veterans Affairs (VA) mortgage
Department of Veterans Affairs (VA) mortgages enable qualifying veterans or their surviving spouses to borrow up to the annual federal limit in order to buy conventional homes, mobile homes, and condominiums with little or no down payment.
The VA guarantees repayment of the loans. This federal guarantee means that banks and thrift institutions can afford to provide 30-year VA mortgages on favorable
Defined benefit plan
terms even during periods when borrow- ing in general is expensive.
Interest rates on these mortgages, formerly fixed by the Department of Housing and Urban Development (HUD), are now set by the VA itself. For more information, call the VA’s local toll-free number listed in your phone book.
Depositary bank
A US bank that holds American depositary shares (ADSs), or shares of corporations based outside the United States, and sells American depositary receipts (ADRs) to US investors is called a depositary bank.
Each ADR represents a specific number of ADSs, based on the bank’s agreement with the issuing corporation. The depositary bank ensures that inves- tors receive dividends and capital gains and handles tax payments that may be due in the country where the share- issuing company is headquartered.
Depository Trust and Clearing Corporation (DTCC)
The DTCC is the world’s largest securities depository, holding trillions of dollars in assets for the members of the financial industry that own the corporation. It is also a national clearinghouse for the settlement of corporate and municipal securities transactions.
The DTCC, a member of the Federal Reserve System, was created in 1999 as a holding company. It has two primary sub- sidiaries, the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC).
It is also the holding company for the Emerging Market Clearing Corporation (EMCC) and the Fixed Income Clearing Corporation (FICC).
The FICC was formed as a merger of the Government Security Clearing Corporation (GSCC) and the Mortgage Backed Security Clearing Corporation (MBSCC).
Depreciation
Certain assets, such as buildings and equipment, depreciate, or decline in value, over time.
You can amortize, or write off, the cost of such an asset over its estimated useful life, thereby reducing your taxable income without reducing the cash you have on hand.
Depression
A depression is a severe and prolonged downturn in the economy. Prices fall, reducing purchasing power. There tends to be high unemployment, lower productivity, shrinking wages, and general economic pessimism.
Since the Great Depression following the stock market crash of 1929, the governments and central banks of industrialized countries have carefully monitored their economies. They adjust their economic policies to try to prevent another financial crisis of this magnitude.
Derivative
Derivatives are financial products, such as futures contracts, options, and mortgage-backed securities. Most of derivatives’ value is based on the value of an underlying security, commodity, or other financial instrument.
For example, the changing value of a crude oil futures contract depends primarily on the upward or downward movement of oil prices.
An equity option’s value is determined by the relationship between its strike price and the value of the underlying stock, the time until expiration, and the stock’s volatility.
Certain investors, called hedgers, are interested in the underlying instrument. For example, a baking company might buy wheat futures to help estimate the cost of producing its bread in the months to come.
Other investors, called speculators, are concerned with the profit to be made by buying and selling the contract at the most opportune time. Listed derivatives are traded on organized exchanges or markets. Other derivatives are traded over-the-counter (OTC) and in private transactions.
Devaluation
Devaluation is a deliberate decision by a government or central bank to reduce
the value of its own currency in relation to the currencies of other countries.
Governments often opt for devaluation when there is a large current account deficit, which may occur when a country is importing far more than it is exporting.
When a nation devalues its currency, the goods it imports and the overseas debts it must repay become more expensive. But its exports become less expensive for overseas buyers. These competitive prices often stimulate higher sales and help to reduce the deficit.
DIAMONDs
A DIAMOND is an index-based unit investment trust (UIT) that holds the 30 stocks in the Dow Jones Industrial Average (DJIA). It’s similar in structure
to an exchange traded fund (ETF). Investors buy shares, or units, of the trust, which is listed on the American Stock Exchange (AMEX) as DIA. The share price changes throughout the day as investors buy and sell, just as share prices of stocks do.
That’s in contrast to open-end mutual funds whose share prices change just once a day, when trading in their under- lying investments ends for the day.
Part of the appeal of DIAMOND shares is that the trust mirrors the performance of its benchmark index for dramatically less than the cost of buying shares in all 30 stocks in the DJIA.
A DIAMOND share trades at about 1/100 the value of the DJIA. So, for example, if the DJIA is at 11,500, shares in the trust will be priced around $115.
Diluted earnings per share
In addition to reporting earnings per share, corporations must report diluted earnings per share. This accounts for the possiblity that all outstanding warrants and stock options are exercised, and all convertible bonds and preferred shares are exchanged for common stock.
Diluted earnings actually report the smallest potential earnings per common share that a company could have based on its current earnings. In theory, at least, knowing the diluted earnings could
influence how much you would be willing to pay for the stock.
Dilution
Dilution occurs when a company issues additional shares of stock, and as a result the earnings per share and the book value per share decline.
This happens because earnings per share and book value per share are calculated by dividing the total earnings or book value by the number of existing shares.
The larger the number of shares, the lower the value of each share. Lower earnings per share may trigger a selloff in the stock, lowering its price. That’s one reason a company may choose to issue bonds rather than new stock to raise additional capital.
Similarly, if companies merge or one buys another, earnings may be diluted if they don’t increase proportionately with the combined number of shares in the newly created company.
Dilution can also occur if warrants and stock options on a stock are exercised, and if convertible bonds and preferred stock the company issued are converted to common stock.
Companies must report the worst-case potential for such dilution, or loss of value, to their shareholders as diluted earnings per share.
Direct deposit
Direct deposit is the electronic transfer of money from a payer, such as your employer or a government agency, directly into a bank account you designate.
DIAMONDs
Direct deposit is faster and cheaper than sending a check and also more secure, which is why both payers and banks prefer this system. In fact, banks often provide free checking or other benefits if your paychecks are deposited directly.
Direct investment
You can make a direct investment in a company’s stock through dividend reinvestment plans (DRIPs) and direct purchase plans (DPPs).
If a company in which you own stock offers a DRIP, you have the opportunity to reinvest cash dividends and capital gains distributions in more stock automatically each time they are paid.
In the case of DPPs, also known as direct stock purchase plans (DSPs), companies can sell their stock directly to investors without using a brokerage firm as intermediary.
Direct investment also refers to long-term investments in limited partner- ships that invest in real estate, leased equipment, and energy exploration and development. In this type of investment, you become part owner of the hard assets of the enterprise.
You realize income from your investment by receiving a portion of the business’s profits, for example, from rents, contractual leasing payments, or oil sales. In some cases you realize capital gains at the end of the investment term, if the business sells its assets.
These DPPs are largely nontraded and have no formal secondary markets. This means you will often have to hold the investment for terms of eight years or more, with no guarantee that any of the income or capital gains will materialize. Many people make direct investments because there can be significant tax benefits, such as tax deferral and tax abatement, depending on the investment.
Direct purchase plan (DPP)
Some publicly held companies offer a direct purchase plan that lets you purchase their stock directly without using a broker.
You may pay a small commission or transaction fee—smaller than if you purchased the shares through a retail broker—although some DPPs charge no fee at all.
Direct purchase plans are similar to dividend reinvestment plans, or DRIPs, with the added benefit that you can make the initial purchase of the company’s stock through the plan rather than having
to purchase stock first, through a broker, in order to be eligible for a DRIP.
It’s easy to open a DPP account, and because it lets you purchase fractional shares of the company’s stock, you can decide whether to invest a lump sum or make small, regular purchases on a set schedule to build your investment. Your shares are registered on the company’s books, and you can sell your shares through the plan as well.
Disclosure
A disclosure document explains how a financial product or offering works. It also details the terms to which you must agree in order to buy it or use it, and, in some cases, the risks you assume in making such a purchase.
For example, publicly traded companies must provide all available information that might influence your decision to invest in the stocks or bonds they issue. Mutual fund companies are required to disclose the risks and costs associated with buying shares in the fund.
Government regulatory agencies, such as the Securities and Exchange Commission (SEC), self-regulating organizations, state securities regulators, and NASD require such disclosures.
Similarly, federal and local govern- ments require lenders to explain the costs of credit, and banks to explain the costs of opening and maintaining an account.
Despite the consumer benefits, disclosure information isn’t always easily accessible. It may be expressed in confusing language, printed in tiny type, or so extensive that consumers choose to ignore it.
DPP
Disclosure
Discount
When bonds sell for less than their face value, they are said to be selling at a discount.
Bonds sell at a discount when the interest rate they pay is lower than the rate on more recently issued bonds or when the financial condition of the issuer weakens.
In the case of rising interest rates, demand for older, lower-paying bonds drops as investors put their money into newer, higher-paying alternatives, so the prices of the older bonds drop. If a rating agency reduces a bond’s rating, the market price tends to drop because investors demand a higher yield for the additional risk they take in buying the bond.
Similarly, closed-end mutual funds may trade at a discount to their net asset value (NAV) as a result of weak investor demand or other market forces. Preferred stocks may also trade at a discount.
In contrast, certain bonds, called original issue discount bonds, or deep discount bonds, are issued at a discount to par value, or full face value, but are worth par at maturity.
Discount brokerage firm
Discount brokerage firms charge lower commissions than full-service brokerage firms when they execute investors’ buy and sell orders but may provide fewer services to their clients.
For example, they may not offer investment advice or maintain indepen- dent research departments.
Because of the information and online account access on most brokerage web- sites, differences between full-service and discount firms are less apparent to the average investor.
Discount point
Some lenders require you to prepay a portion of the interest due on your mortgage as a condition of approving the loan. They set the amount due at one or more discount points, with each discount point equal to 1% of the mortgage loan principal.
For instance, if you must pay one point on a $100,000 mortgage, you owe $1,000.
From your perspective, the advantages of paying discount points are that your
long-term interest rate is lowered slightly for each point you pay, and prepaid interest is tax deductible. The advantage, from the lenders’ point of view, is that they collect some of their interest earnings up front.
Discount rate
The discount rate is the interest rate the Federal Reserve charges on loans it makes to banks and other financial institutions.
The discount rate becomes the base interest rate for most consumer borrowing as well. That’s because a bank generally uses the discount rate as a benchmark for the interest it charges on the loans it makes.
For example, when the discount rate increases, the interest rate that lenders charge on home mortgages and other loans increases. And when the discount rate is lowered, the cost of consumer borrowing eventually decreases as well.
The term discount rate also applies to discounted instruments like US Treasury bills. In this case, the rate is used to identify the interest you will earn if you purchase at issue, hold the bill to matu- rity, and receive face value at maturity.
The interest is the difference between what you pay to purchase the bills and the amount you are repaid.
Discretionary account
A discretionary account is a type of brokerage account in which clients authorize their brokers to buy and sell securities on their behalf without prior consent for each transaction.
A client may set guidelines for the account, such as the types of securities the broker may purchase. However, the broker can buy and sell shares at his or her discretion.
Managed accounts—also called separate accounts and wrap accounts— are one type of discretionary account.
Disinflation
Disinflation is a slowdown in the rate of price increases that historically occurs during a recession, when the supply of goods is greater than the demand for them.
Unlike deflation, however, when prices for goods actually drop, disinflation prices do not usually fall, but the rate of inflation becomes negligible.
Dispute resolution
Dispute resolution—sometimes called alternative dispute resolution—refers to