Financial Glossary


D

Days Sales Outstanding (DSO). A number used to determine whether a company, usually technology-based, is trying to disguise weak sales. The number is derived from accounts receivable divided by sales for a quarter, times 91.

Day Trader. Day traders are in-and-out of the market many times during the course of one trading session and often do not hold a position in any stocks overnight. This approach generates a lot of commissions and portfolio turnover, and denies the day trader the ability to participate in the long-term creation of wealth through compounded growth. It also makes for a lot of time in front of a computer.

Deal Breaker. A deal breaker is a significant issue relating to the proposed financing between the prospective investor and the entrepreneur that needs to be resolved in order to close the deal.

Deal Flow. Termed also as dealflow. This is the rate at which investment offers are presented to funding institutions.

Deal Structure. The manner in which a transaction is structured, with examples including an Asset Purchase or a Stock Purchase.

Debenture. An unsecured bond. A certificate of indebtedness of a government or company backed only by the general credit of the issuer and unsecured by mortgagor lien on any specific assets.

Debt. Debt, also referred to as a liability, is an amount owed by someone (the debtor) to another (the creditor). Common forms of debt securities are notes or bonds. If the debt is not secured by collateral it is unsecured debt, if it is secured by collateral the debt is referred to as secured debt. (See Subordinated Debt.) In short, an obligation to repay a sum of principal, plus interest. In corporate terms,debt often refers to bonds or similar securities.

Debt Capacity. An assessment of ability and willingness to repay a loan from anticipated future cash flow or other sources.

Debt/Equity Ratio. A comparison of debt to equity in a company's capital structure.

Debt/Equity Swap. A transaction in which a corporation exchanges newly issued stock (equity) for already existing bonds (debt).

Debt Financing. Raising loan capital through the creation of debt by issuing a form of paper evidencing amounts owed and payable on specified dates or on demand.

Debt Ratios. Financial ratios used to indicate the extent debt is being used by a company as a source of capital. Examples include, Debt to Equity, debt to total assets, and fixed charge coverage. Debt ratios are typically important to lenders. A high ratio indicates higher debt levels that may allow higher equity returns but often means higher risks. In short, Total debt divided by total assets.

Debt to Equity Ratio. An indicator of Financial Leverage or how much debt a company has in relation to Stockholders' Equity. Derived by dividing long-term debt by Stockholders' Equity.

Default. Failure of a debtor to make timely payments of principal and interest as they become due.

Defensive Stock. A stock of a company with a record of stable earnings and continuous dividends, which has demonstrated relative stability in poor economic conditions.

Deferred Gain. The gain in the value of an investment (either in interest, dividends or both) that is not taxed until a later date (for example, when you sell a home and reinvest the proceeds in a new home).

Deferred Profit Sharing Plan. A registered plan for retirement savings purposes. Employers are the only ones that make contributions to this type of plan. Contributions made to the plan are based on the profits earned by the business.

Deferral. A form of tax sheltering that results from an investment that offers deductions during the investor's high-income years, and/or postpones capital gains or other income until after retirement or during another period when the income level is expected to change.

Deficit. The shortfall between government revenues and budgetary spending in any given year. A surplus occurs when annual revenues exceed expenditures.

Demand Loan. A loan which must be repaid in full on demand.

Demand Registration Rights. An investor's contractual right to demand that the issuer register specified restricted securities with the SEC and the state securities agencies so that the restricted securities become registered and freely tradable. Demand registration rights force a company to file a registration statement permitting the holder to conduct a public offering of the holder's securities. Generally, demand registration rights are available only after a company's initial public offering to facilitate the sale of restricted securities that cannot otherwise be sold without registration.

Denomination. The principal amount, or value at maturity, or a debt obligation. Also known as the par value or face value.

Depreciation. Charges made against earnings to write off the cost of a fixed asset over its estimated useful life. Depreciation does not represent a cash outlay. Itis a bookkeeping entry representing the decline in value of an asset that iswearing out.

Derivative. An investment contract based on an underlying investment called an "instrument." The most common type of derivative is an option contract, which involves the right to buy or sell the underlying instrument at an agreed price. Futures contracts are also derivatives.

Dilution. Dilution from an accounting perspective is the net difference between the purchase price per share paid by a new investor to buy a security from the company and the tangible book value per share of the company prior to the offering. Dilution from an investor perspective is the change to an investor's percentage ownership in a company that results from a subsequent issuance of additional equity securities. Put another way, reducing the actual or potential earnings per share by issuing more shares or giving options to obtain them.

Direct Financing. This is a financing without the use of underwriting. Direct financing is often done by investment bankers.

Discount. The amount by which a bond sells on the secondary market at less than its par value or face value.

Discount Brokerage. A brokerage that charges less than a full-service brokerage because it does not offer investment advice from analysts and brokers. Typically, discount brokers buy and sell stocks for their customers without recommending choices. However, they may offer general investment advice as well as news and some other services. They usually offer their services over the phone, the Internet, and at their offices.

Discount Rate. A rate of return used to convert a monetary sum, payable or receivable in the future, into present value. Put another way, the rate used to determine the present value of a stream of future cash flows. The discount rate is calculated based on the Required Rate of Return after taking into account the riskiness and timing of the future cash flows.

Discounting. The process of finding the present value of a series of future cash flows. Discounting is the reverse of compounding.

Discounting of Accounts Receivable. Short-term financing in which accounts receivable are used as collateral to secure a loan. The lender does not buy the accounts receivable but simply uses them as collateral for the loan. Also called pledging of accounts receivable.

Discretionary Expenses. Spending over which the individual has control, such as major purchases, vacations and savings.

Discretionary Items. These are generally items paid to owners of a business which may not be viewed required by another owner.

Distributions. Payments to investors by a mutual fund from income or from profit realized from sales of securities.

Diversification. Spreading investment risk by buying different companies indifferent industries and/or in different countries.

Dividend. A portion of a company's profit paid out to common and preferred shareholders, the amount having been decided on by the company's board of directors. A dividend may be in the form of cash or in additional stock. A preferred dividend is usually a fixed amount, while a common dividend fluctuates according to the earnings of the company. It may be omitted if business is poor or the directors withhold earnings to invest in plant and equipment.

Dividend Reinvestment Plan (DRIP). A program in which a current stockholder can reinvest the dividends from those shares for additional shares. This bypasses the broker, and any attached commissions.

Dividend Yield. The annual percentage of return paid to a stockholder by a company. Dividend yield is calculated by dividing the amount of dividends per share by a stock's current market price. For example, if a stock's current price is $40, and the company pays a $5.00 dividend per share per year, then the dividend yield is 12.5 per cent (5/40 = .125, which equals 12.5 per cent). Several popular investing strategies are based on stocks' dividend yield. You can find a stocks' dividend yield in most newspapers.

Dollar Cost Averaging. Buying securities at regular intervals with specific and equal dollar amounts. This results in lowering the average price of securities because more are purchased when the prices are depressed than when they are high.

Dogs of the Dow. The five lowest priced of the ten highest yielding stocks in the Dow Jones Industrial Average (selected on December 31, 1998.)

Double Taxation. Taxation of profits at both the corporate and the stockholder level. The corporation is taxed on its income and stockholders are taxed on dividends paid by the corporation.

Dow Jones Industrial Average (DJIA). Often known as "the Dow," this average is one of the most frequently quoted market indexes in the news. It refers to a weighted average of 30 widely-traded blue chip stocks (such as IBM and Coca-Cola). The closing prices of these 30 stocks are added and then divided by a factor that accounts for stock splits and other market changes. (The number refers to points, not dollars.) Because these stocks are in a variety of sectors and are actively traded, they are considered a good reflection of the market.

Dow Theory. A theory of market analysis based upon the performance of the Dow Jones Industrial and Transportation Averages. The theory is that the market is in a basic upward trend if one of these averages advances above a previous important high, accompanied or followed by a similar advance in the other. When both averages dip below previous important lows, this is regarded as confirmation of a basic downward trend.

Down Round. A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the company by earlier investors. Down rounds cause dilution of ownership for existing investors. This often means the Company's founders stock or options are worth much less, or even nothing at all. Unfortunately, sometimes the only other option is going out of business. In this case down rounds are necessary and welcomed. Down rounds are commonplace when a red hot economy turns bad. A perfect example was the dot-com crash of 2000-2001.

Drag Along Rights. The right of a security holder to force another security holder to sell his/her stock (usually in connection with a sale of the company), provided that the person being dragged receives the same price, terms, and conditions for the security being sold as the person exercising the drag along rights. By allowing the elimination of minority investors, drag along rights facilitate the ability to sell 100 percent of a company's securities. Drag along rights are eliminated in connection with an initial public offering.

Drive-By Deal. This is a slang often used when referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the startup.

Due Diligence. The responsibility of entities or individuals involved in a securities offering to investigate the information in the offering memorandum or prospectus to provide a reasonable basis for believing that the information contained is true and that the offering documents do not omit to state a material fact. Acquisitions are often contingent upon the satisfactory completion of the due diligence process. In short, it is the process of systematically evaluating information, to identify risks and issues relating to a proposed transaction.(i.e. verify that information is what it is proposed to be).

Dumping. Dumping is the sale of a product for export at a price which is less than the price charged in the ordinary course of trade for the same product when sold in the domestic market of the exporting country. When there are no domestic sales in the ordinary course of trade or when domestic sales are of a low volume, dumping is deemed to occur when the price for export is less than i) the cost of production plus a reasonable amount for general selling and administrative costs and profits, or ii) the price charged on exports to a third country.

Duration. Duration measures the change in the value of a bond's servicing for the next incremental change in interest rates. A negative duration means that values fall when rates fall (just the opposite of a bond). Duration alone does not fully explain changes in value over large changes in interest rates.