Financial Investigations Glossary
By: Bill E. Branscum
Copyright 2001

This is a glossary of terms that are, for the most part, unique to the world of financial investigations, or terms that have a different meaning than that which is commonly understood when they are used in this context.

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Dealer: An individual or firm in the securities business who acts as a principal rather than as an agent in a specific transaction. Principles buy and sell securities for their own account and risk. A dealer's profit or loss is derived from the difference between the price he/she pays for the security and the price he/she receives when selling the security to a customer. Because most individuals and firms act as both brokers and dealers, the term broker-dealer is commonly used.

Death Spiral: When a company desperately needs cash, so an investor lends the money in exchange for convertible debt. This debt (like a convertible bond) typically has provisions that allow the investor to convert the bond into stock at below market prices. These investors then short the company's stock and try to drive its price down. The lower the stock goes, the more shares the investor will get when he/she converts. The investor then closes out their short position with the shares they get from the conversion.

Debenture: An unsecured (without collateral) bond backed only by the integrity of the issuer (borrower). The parameters of the bond are set forth in an agreement called an indenture.

Debt: 1) Common name for bonds and other forms of paper evidencing the amount owed and whether it is payable on a specific date or on demand. 2) One party's legal obligation to pay another party in accordance with an expressed or implied agreement. The debt may or may not be secured.

Debt Instrument: A written agreement denoting that the issuer promises to reimburse a debt. Examples are Treasury Bills, Notes and Bonds, Banker's Acceptances, Commercial Paper and Certificate of Deposits.

Debtor: A business or individual that borrowed money that needs to be reimbursed to the creditor.

Debt Retirement: The repayment of specific debt. There are two methods used to retire debt--sinking fund and serial. Sinking fund and serial bonds are not types of bonds, just methods of retiring them. The sinking fund method, in which money is set aside each year to retire debt, is most commonly used for corporate debt. Conversely, the serial method is more commonly used in the debt retirement of municipal bonds. When bonds are issued in serial form, parts of the issue, known as a "series," are retired in various time schedules, usually semiannually or annually.

Declaration of Trust: A document creating a trust; a trust deed.

Deduction: An expense that can be subtracted from an individual's adjusted gross income to obtain their taxable income. The type of expense deductions allowed is determined by the Internal Revenue Service (IRS). Examples include state and local taxes, charitable contributions and mortgage interest paid.

Deferral of Taxes: The deferment of making tax payments from this year to a later year. For example, money in an Individual Retirement Account (IRA) grows tax deferred until the money is withdrawn from the account.
Deferred Account: An account, such as an Individual Retirement Account or Profit Sharing Plan, that delays taxes until a later date.

Deferred Annuity: An annuity in which its contract provides that payments to the annuitant are delayed until certain thresholds have been attained (e.g., when the annuitant attains a certain age)--also called a "deferred payment annuity."

Deferred Interest Bond: A bond, such as a zero coupon bond, that pays interest and repays principal in one lump sum at maturity.

Deficiency Letter: A written notice sent by the Securities and Exchange Commission (SEC) to the issuer of an anticipated new issue. The notice states that there are omissions of material fact in the registration statement and/or that the preliminary prospectus needs revision. If immediate action is not taken by the issuer, the registration period may need to be extended.

Deficit Spending: A shortage that is financed by government borrowing. This shortage occurs when the amount of government expenditures exceeds government revenues.

Defined Benefit Pension Plan: A retirement plan that stipulates that each participant will receive a set payment after a predetermined number of years of service. It does not pay taxes on investments within the plan. Contributions to the plan may be by employer only, employee only or both.

Deflation: A persistent price decline of goods and services--the inverse to inflation. Deflation usually occurs during a recession and is characterized by supply exceeding demand, and while there is increased buying power, the amount of currency in circulation is greatly reduced. Marked deflation generally affects production and employment negatively. Deflation should not be confused with disinflation, which is a result of a slow down in the rate that prices increase.

Demand Deposit: A type of bank account whereby the account balance can be withdrawn by the depositor without prior notice to the bank (e.g. checking accounts). The balance can be withdrawn via check, automatic teller machine or by transfers to other accounts using a PC or telephone. The Federal Reserve uses demand deposits as a primary indicator as to when to implement monetary policy because they are the largest component of the money supply.

Deposit: 1) Securities put into a customer's account at a financial institution (e.g., brokerage firm). 2) Cash, checks, or drafts credited to a customer's account at a financial institution (e.g., bank checking and saving accounts). 3) Money put down as an indication of good faith in contracts and vendors, such as utility and telephone companies, to protect the other party against nonpayment, property damage and contract defaults.

Depositary Bank: When a company decides to issue American Depositary Receipts, it appoints an authorized depositary, normally part of a large U.S. banking institution or trust company.

Depository Trust Company (DTC): A central securities certificate repository that is a member of the Federal Reserve System and is industry-owned. The New York Stock Exchange is the majority owner. DTC members deliver securities to each other via computerized debit and credit entries. This reduces the need to actually move paper certificates.

Depreciation: A bookkeeping entry that does not require cash outlay nor funds to be earmarked. The entry is a charge against earnings to write off the cost of an asset over its assessed useful life over a set time period. It reduces taxable income but does not reduce cash. The most commonly used depreciation methods are Straight-line Depreciation and Accelerated Cost Recovery System (ACRS).

Depression: Economic situation characterized by rising unemployment, an excess of supply over demand, deflation, reduced purchasing power, contraction of general business activity and public fear.

Derivative Instrument: Financial instrument whose price is based on an underlying security--for example, an option's value can be derived either from its underlying stock, stock index, or future (dependent upon the type of option).

Director: An individual elected by corporate shareholders to serve on that corporation's Board of Directors. The Board of Directors decide when dividends will be paid, appoint the corporation's president, vice president and all other officers.

Direct Participation Programs: Partnership agreements that provide a flow-through of tax consequences to the participants.

Direct Public Offering: Where a company raises capital by marketing its shares directly to its own customers, employees, suppliers, distributors and friends in the community. DPO’s are an alternative to IPO’s, the classic underwritten public offerings by securities broker-dealer firms, in which a company's shares are sold to the broker's customers and prospects.

Discharge of Bankruptcy: Order ending bankruptcy proceedings. It usually releases the debtor of any legal liability for specific obligations.

Discharge of Lien: Order removing a lien on property after the claimant has been paid or the debt is otherwise satisfied.

Discount Broker: A brokerage firm that executes buy and sell orders at lower commission rates than those charged by a full service broker.

Discount Rate: The rate of interest charged by a Federal Reserve Bank on a loan to a member bank, using government securities or eligible paper as collateral.

Discount Window: Federal Reserve location where banks can borrow money at the discount rate.

Discretionary Account: A type of brokerage account whereby clients authorize their broker to buy and sell securities or commodities when the broker deems it is appropriate. The broker will decide when and which securities, the amount of shares, and price to be paid or received without the client's prior knowledge or consent. Some clients may set guidelines for the broker, such as limiting the type of securities in which to invest.

Discretionary Income: The amount of income leftover after essential commitments, such as housing and food, have been paid. Spending discretionary income can spur the economy. Thus, the amount of discretionary income can be a key economic indicator.

Discretionary Order: An order to buy or sell a security for a customer that lets the broker, who has limited power of attorney over the customer's account, decide when to execute the trade and at what price.

Discretionary Trust: Mutual fund or unit trust where the management decides on the best way to invest the assets. The fund is not limited to a specific kind of security.

Disinvestment: Capital investment shrinkage caused by a firm's failure to maintain or replace capital assets being used up or by the firm's sale of capital goods such as equipment.

Disposable Income: Income that remains after tax payments. This money may be spent on essentials (e.g., food and shelter), nonessentials (e.g., dining in a restaurant) or it can be saved.

Dissolution: The termination of a business endeavor.

Distributing Syndicate: Group of brokerage firms or investment bankers that work together to expedite the distribution of securities in an offering.

Distributions: The payment, to investors, of realized capital gains on securities within the portfolio of a mutual fund or closed-end investment company.

Diversification: Spreading risk by placing assets in different types of investments (i.e., mutual funds, stocks, bonds, etc.) and various companies in different industry groups (i.e., pharmaceutical, utility, airline, etc.).

Diversified Investment Company: Term used for either closed or open-ended mutual funds or unit trusts that invest in many different kinds of securities and companies. Under the Investment Company Act of 1940, an investment company, with respect to 75% of its portfolio, may not have more than 5% of its assets invested in the securities of any one issuer and may not own more than 10% of the voting shares of any one issuer.

Divestiture: Disposal of an investment by sale, liquidation or other means. This legal term is also used to describe a corporation's systematic distribution of large blocks of another company's stock which were being held as an investment.

Dividend: Distribution of a company's earnings to its shareholders, usually in the form of a quarterly check. The company's board of directors authorize and determine the amount of the dividend. Dividends are taxed as income in the year they are received by the shareholder. A mutual fund dividend is paid out of income and the shareholder's tax is dependent on whether the distributions originated from interest income, capital gains, or dividends received by the fund.

Dividend Record: A Standard & Poor's publication that gives data on corporate payment histories and policies.

Dividend Reinvestment Plan (DRIP): A program in which a dividend paying company (especially mutual funds) will automatically reinvest an investor's dividend to purchase additional shares of the company's stock. The dividend is still taxable by the IRS. In participating in a DRIP, investors use dollar cost averaging to increase their amount of capital in the stock.

Dividend Requirement: The amount of annual earnings needed to pay a preferred stock's contracted dividend.

Dividend Yield: The annual percentage of return that the dividend provides to the investor on either common or preferred stock-often referred to as just "yield." The yield is calculated by dividing the annual cash dividend per share by the stock's market price at the time of purchase.

Dividends Payable: Dollar amount of dividends that are obligated to be paid once a dividend is declared by the board of directors. The dollar amount is listed as a liability in the annual and quarterly reports.

Dollar Bond: 1) Municipal revenue bonds that are quoted and traded at a dollar price rather than at a yield to maturity. 2) Bonds that are issued in the United States by foreign companies and denominated in US dollars. 3) Bonds that are issued outside the United States and denominated in US dollars.

Donor: A transferor. One who transfers title to an asset by gifting.

Double Taxation: Corporate earnings taxed at both the corporate level and again as a stockholder dividend.

Dow Jones Composite: Combination of the Dow Jones Industrial Average (DJIA), Dow Jones Transportation Average (DJTA) and the Dow Jones Utility Average (DJUA).

Dow Jones Industrial Average (DJIA): Average of the prices of 30 well-known, predominantly blue-chip, industrial stocks. The following 30 stocks make up the DJIA as of February 1995: Allied Signal; Alcoa, American Express; A T & T; Bethlehem Steel; Boeing; Caterpillar; Chevron; Coca Cola; Disney; Dupont; Exxon; General Electric; General Motors; Goodyear; IBM; International Paper; Kodak; McDonalds; Merck; 3M; JP Morgan; Philip Morris; Proctor Gamble; Sears; Texaco; Union Carbide; United Tech; Westinghouse and Woolworth.

Dow Jones Transportation Average (DJTA): Average of the prices of 20 representative transportation companies.

Dow Jones Utility Average (DJUA): Average of the prices of 15 geographically representative gas and electric utility companies.

DPP (Direct Participation Program): A business venture, usually organized as a limited partnership, that is structured to pass-through income and "tax losses" of the underlying investments to investors. However, its use as a tax shelter has been severely reduced by tax legislation.

Draining Reserves: Actions that are taken by the Federal Reserve to reduce the money supply in order to cut the funds available to banks for lending purposes. The Fed accomplishes this by:

  • Raising reserve requirements--banks will need to keep more money on deposit with Federal Reserve banks;
  • Escalating the rate that banks borrow to maintain reserves--making it unattractive to drain reserves by making loans; and
  • Selling bonds at such attractive rates that dealers will reduce their bank balances to buy them.

DRIP (Dividend Reinvestment Plan): A program in which a dividend paying company (especially mutual funds) will automatically reinvest an investor's dividend to purchase additional shares of the company's stock. The dividend is still taxable by the IRS. In participating in a DRIP, an investor uses dollar cost averaging to increase their amount of capital in the stock.

DTC (Depository Trust Company): A central securities certificate repository that is a member of the Federal Reserve System and is industry-owned. The New York Stock Exchange is the majority owner. DTC members deliver securities to each other via computerized debit and credit entries. This reduces the need to actually move paper certificates.

Dual Listing: A security that is listed on more than one exchange--either the New York Stock Exchange and a regional exchange or the American Stock Exchange and a regional exchange. However, a security may not be listed on both the New York and American stock exchanges. Being dual listed increases the liquidity of a security.

Dual Purpose Investment Company: An exchange listed closed-end investment company that issues two classes of shares--income and capital. The income (preferred) shareholders receive all the income (dividends and interest) from the portfolio, and the capital (common) shareholders receive all the capital gains. As dual purpose funds are not highly traded, many analysts do not follow them closely.

Due Diligence: A thorough investigation, typically of a company that is preparing to go public, usually undertaken by the company's underwriter and accounting firm. It is a term that can be applied to any investigative inquiry as defining the standard of care involved.

Dumping: Event that occurs when a seller offers a large amount of stock for sale with no concern as to how it will affect the stock's price or the market.

Dun & Bradstreet (D & B): Company that provides subscribers with a ratings directory and credit reports of corporations. It also publishes financial composite ratios and offers an accounts receivable collection service. Moody's Investor Service, which rates bonds and commercial paper, is a subsidiary of D & B.

Dutch Auction: Auction method used in which the security's price is gradually lowered until it meets an acceptable bid and is sold. The Treasury uses this auction system when selling new notes or bonds to determine the lowest bid price (stop-out price). The opposite is the "auction market" system used by major stock exchanges.

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I welcome your comments, questions and suggestions.

© Copyright 2002 - Bill E. Branscum. All Rights Reserved.