Glossary

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Default

A corporation or government is in default if it fails to meet the interest payments on debt securities it has issued or does not repay the principal at maturity. When the issuer defaults, the bondholders may try to recover what they're owed by making claims against the issuer's assets. There's a structured hierarchy for determining the order in which the claimants are paid.Similarly, if you fail to pay principal and interest that you owe on a loan, you are in default. The lender may attempt to recover the loss by claiming any property of yours that was offered as collateral, or security for the loan, or by taking other legal measures.

Deferred annuity

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.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.

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.

Diversification

Diversification is an investment strategy in which you spread your investment dollars among different markets, sectors, industries, and securities. The goal of the strategy is to protect the value of your overall portfolio in case a single security or market sector takes a serious downturn and drops in price. A well-diversified stock portfolio, for example, might include small-, medium-, and large-cap domestic stocks, stocks in six or more sectors or industries, and international stocks.Studies indicate that diversification can help insulate your investments against market and management risks without sacrificing the level of return you want. Finding the diversification mix that's right for you depends on your age, your assets, your tolerance for risk, and your investment goals.

Dividend

Corporations may pay part of their earnings as dividends to you and other shareholders as a return on your investment. These dividends, which are often declared quarterly, are usually in the form of cash, but may be paid as additional shares or scrip. You may be able to reinvest cash dividends automatically to buy additional shares if the corporation offers a dividend reinvestment program (DRIP).Dividends are taxable unless you own the investment through a tax-deferred account, such as an employer-sponsored retirement plan or individual retirement annuity (IRA). That applies whether you reinvest them or not. However, dividends on most US and many international stocks are considered qualifying dividends. That means you owe tax at your long-term capital gains rate provided you have owned the stocks the required length of time.Dividends on real estate investment trusts (REITs), mutual savings banks, and certain other investments aren’t considered qualifying and are taxed at your regular rate.

Dividend reinvestment plan (DRIP)

Many publicly held companies allow shareholders to reinvest dividends in company stock or buy additional shares through dividend reinvestment plans, or DRIPs. Enrolling in a DRIP enables you to build your investment gradually, taking advantage of dollar cost averaging and usually paying only a minimal transaction fee for each purchase.Many DRIPs will also buy back shares at any time you want to sell, in most cases for a minimal sales charge.One potential drawback of purchasing through a DRIP is that you accumulate shares at different prices over time, making it more difficult to determine your cost basis — especially if you want to sell some but not all of your holdings.

Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average (DJIA), sometimes referred to as the Dow, is the best known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip US stocks. Though it is called an average, it is actually a price-weighted index. That means the gains and losses of the highest priced stocks are counted more heavily than gains and losses of lower priced stocks.The DJIA is quoted in points, not dollars. It's computed by totaling the weighted prices of the 30 stocks and dividing by a number that is regularly adjusted for stock splits, spin-offs, and other changes in the stocks being tracked.The companies that make up the DJIA are changed from time to time at the discretion of the S&P DJI Index Committee.
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