Glossary

Welcome to Fineco’s Glossary! It will help you better understand the financial terminology and master your financial skills.

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Day trading

Day trading involves buying and selling securities within a single day in order to profit from price fluctuations during the course of that day. It is considered a speculative activity and usually centres on trade in stocks or foreign currencies. Many see day trading as a high-risk pursuit.

Day traders deploy a variety of strategies to turn a profit, including scalping (making quick and frequent profits on small gaps in the bid-ask spread), news playing (predicting and cashing in on stock price changes based on announcements of good or bad news), or high frequency trading (using algorithms to make a high volume of trades and exploit small market inefficiencies).

DAX

The Deutscher Aktien Index (abbreviated DAX) is a stock market index that tracks 30 of the largest German companies trading on the Frankfurt Stock Exchange. Some economists use the index as a measure of the health of the German economy, while others consider it to be an unrepresentative reflection of a limited sector of the economy. The index includes companies such as BMW, Adidas, and Siemens. Comparable indexes often used as a proxy for the broader market include the French CAC 40 index and Britain’s FTSE100, as well as the Dow Jones Industrial Average in the United States.

Debit

In consumer banking, a debit is an entry in bank account records showing money that has been taken out of the account. In common banking parlance, if an account is debited, funds are removed from it.

However, in bookkeeping, a debit is a record of a transfer of money to the person associated with the account. Debits increase the value of asset or expense accounts, and decrease the value of liability, income, or equity accounts.

Debit balance

A debit balance occurs when more money is taken out of a bank account than was actually in it in the first place. In other words, it is when an account has a negative cash balance. When this occurs, the account is said to be overdrawn. If the account has overdraft services, the balance may be brought back up to zero.

In investing, a debit balance is a trader’s debt to a lender after being loaned money to purchase securities. This balance occurs during the practice of margin trading, where a broker lends a customer money through a margin account, so they can make a bigger trade.

Debit card

A debit card is a plastic payment card, usually containing a chip or magnetic stripe with identification data, that is issued by a financial institution and linked to a specific account within that institution. It is also known as a cheque card.

A debit card allows the holder to access funds in that account and use them to pay for goods or services without having to carry cash. It can also be used to withdraw money from an ATM. Unlike a credit card, which uses borrowed funds that the cardholder must then pay back, a debit card immediately takes money out of the holder’s account. The holder can spend up to the amount of the actual funds available in that account.

Debt Ratio

The debt ratio is a financial indicator that shows how leveraged a company is, which means the extent to which it uses debt rather than equity to fuel its growth. It is calculated by dividing total debt by total assets.

In general, companies with a higher debt ratio are higher-risk investments; however, a very low debt ratio could signal an overreliance on equity to fund a business’s operations and growth and poor capacity to use debt properly as a business tool. Debt ratios can vary widely between industries depending on the levels of capital each requires, so it is generally only helpful to compare debt ratios between companies in the same sector.

Deferred Revenue

Deferred income is an accounting term for revenue received for goods or services that have not yet been delivered. Alternative terms for this concept are “unearned income” and “unearned revenue”.

This concept only applies in an accrual accounting system, where expenses and income are recorded when incurred rather than when paid. An example of deferred income is a car insurance policy that was paid a year in advance. The insurance company would record this payment as deferred income (a liability) and change the entry to revenue in monthly increments as it actually delivers the coverage.

Deflation

Deflation occurs when a unit of currency gains purchasing power over time due to falling prices of goods and services. While this trend can immediately benefit consumers by making their money go farther, it can lead to problems like decreased consumer spending (since deflation incentivizes saving), increased real value of debt, and higher real interest rates. Lower demand can also lead to a drop in production, which in turn leads companies to cut jobs, and then rising unemployment can further undermine demand. Deflation is often a harbinger of a severe economic downturn.

Demand Curve

The demand curve is a graph showing volume of demand as a function of price. Under normal conditions, it is almost always a downward curve because as the price falls, demand increases.

The slope of the curve (how steep it is) is determined by demand elasticity, which means how close the correlation between price and demand is. Other factors like demographic changes can also influence a demand curve.

Demonetization

Demonetization is a legal process by which a government strips a unit of currency (coin, note, or some cases an entire currency) of its status as legal tender. Reasons for demonetization include:

  • Combatting hyperinflation. For example, in 2015 the government of Zimbabwe demonetized its national currency and declared three different foreign currencies as legal tender as a solution to its 200,000,000% inflation.
  • An orderly political or economic consolidation. The prime example of this type of demonetization is the withdrawal of different national currencies in favour of the euro during the formation of the European Union.
  • Curbing criminal activity. For example, in 2016 India demonetized certain large notes to undermine counterfeiting, black-market operations and accelerate the transition to digital transactions.

Depreciation

In accounting, depreciation is the erosion of the value of an asset over time. This concept applies to tangible assets and reflects how much of an asset’s “worth” has been used up by wear and tear.

In currency trading, depreciation refers to a fall in value of one currency in relation to another. As a currency depreciates, it affects imports and exports, causing domestic goods and services to become more competitive on foreign markets and foreign goods and services to be less competitive at home. The opposite of depreciation is appreciation.

Derivative trading

Derivative trading is the exchange of financial instruments whose value is derived from the performance of an underlying asset or group of assets, which could be stocks, bonds, currencies, or commodities. With derivatives, the investor has no holding in the underlying asset or portfolio itself. Rather they take positions based on their prediction of whether the price will rise or fall. Many investors trade in derivatives for the purpose of profiting from price increases or hedging against risks of falling prices. Common types of derivatives are futures, forwards, options, swaps, and contracts for difference (CFDs).

Derivatives can be traded over-the-counter in a privately negotiated contract between two parties. Alternatively, they can be exchange traded, in which case they are more standardised and subject to regulations.

Derivatives

Derivatives are one of three main classes of financial instruments, along with stocks and debt instruments. A derivative is a financial instrument that derives its value from the performance of an underlying asset or group of assets. An investor who trades in derivatives does not usually take delivery of the asset itself. This vehicle allows investors to access markets they would not normally be able to, and, using the concept of leverage, allows them to magnify their profits from price changes without the need to invest massive amounts of money. Common types of derivatives are futures, forwards, options, swaps, and contracts for difference (CFDs). This type of financial instrument rose to prominence in the 1980s.

Descriptive Statistics

Descriptive statistics is an area in the field of statistics that examines the characteristics of a data set itself without aiming to extrapolate broader conclusions from it based on probabilities. It can be understood in contrast to inferential statistics, which is concerned with drawing conclusions about a larger population based on a data set. The two main conceptual themes in descriptive statistics are:

  • Central tendency, which describes the centre of the data set. Common statistical tools in this category are mean, median and mode;
  • Variability, which explores distribution of the data across the set, or its dispersion. Key measures in this category are standard deviation, as well as kurtosis and skewness (which describe the shape of distribution).

Investors can use descriptive statistics like key performance indicators (KPIs) to help ascertain a company’s performance, growth potential, and value.

Devaluation

Devaluation is an intentional decision by a government to push the value of a currency downward (compared to other currencies).

It is not to be confused with depreciation, which is when a currency’s value erodes unintentionally because of botched monetary policy or other political or economic factors. Countries may pursue a policy of devaluation to make their exports more competitive, which will usually make trade deficits smaller and trade surpluses bigger. They also may seek to devalue a currency to make sovereign debt payments less costly. If mishandled, devaluation can cause a currency war between countries that can lead to inflation.

Digital Currency

A digital currency is any form of money that is purely electronic and has no physical form (like a bill or coin does). Because digital currencies are recorded using online systems and no tangible asset has to change hands, they can streamline financial transactions. The many types of digital currencies include:

  • Electronic money: this form of digital currency is backed by fiat money, so it can be directly exchanged for government-issued bills and coins. Electronic money transactions usually take place through banks’ computer systems.
  • Crypto-currencies: these currencies are not backed by the government. They are secured using cryptography and recorded using a non-centralized system called a distributed ledger.
  • Central bank digital currencies. This new class of currency is like fiat currency in that it is issued and backed by a central bank, but it has no tangible counterpart.

Direct tax

Direct taxes are those paid straight to the government, like income tax, property tax, or corporate tax. They stand in contrast to indirect taxes, which are transaction-based, like sales tax or VAT. Direct taxes are designed according to the taxpayer’s ability to pay, meaning those with more means are charged more taxes. Some view this as a more equitable system than indirect taxes, where the burden falls on anyone who buys goods and services, regardless of their ability to pay.

Diseconomies of Scale

Diseconomies of scale are situations in which costs per unit grow rather than shrink as production volume increases. They are the opposite of economies of scale, where the cost of goods come down as output goes up, giving a business advantage and allowing it to be more profitable than its competitors or lower the cost of its products.

Diseconomies of scale can be grouped into two general categories:

  • Internal: inefficiencies within the company themselves, like the organizational growing pains of having to hire and manage more workers, overcrowding, motivation falling as an enterprise expands, or communication difficulties as a result of scaling up.
  • External: environmental factors that curtail efficiency. For example, the strain on infrastructure (such transportation or utilities) due to rapid growth can make larger-scale production less efficient. Likewise, as demand rises for a finite raw material used in the production process, so will its price and cost will increase along with volume.

Disposable Income

Disposable income is an economic term for the post-tax income of a person or household. However, the term is often informally used to mean income after taxes and after all expenses to cover basic necessities (food, shelter, clothing, etc.) have been deducted.

The technical term in economics for this second concept is discretionary income. Economists use disposable and discretionary income to calculate indicators like the personal savings rate (the percentage of income saved for retirement or other purposes), marginal propensity to save, and marginal propensity to consume. These indicators can provide important clues about the economy’s health because they show how much money households have available to put back into the market through consumption.

Divergence

Divergence is when the price of an asset rises or falls when an indicator or other data suggests the opposite should be occurring. It is the opposite of confirmation, which is when the price and indicator are tracking in the same direction. Positive divergence is when the indicator moves upward while the asset trends downward, and it is potentially a sign that prices will start rising. Negative divergence is the opposite and portends lower prices. Traders look at divergence to determine the momentum of trends and make decisions about closing or opening positions.

Diversification

Diversification is an investment strategy under which investors distribute their portfolio across various instruments, asset classes, and/or markets to limit their exposure to any particular risk.

For example, a diversified portfolio will often contain both stocks —generally considered higher risk and higher return vehicles— and bonds, which have lower risk and often move in the opposite direction of equity markets. The fundamental aim of diversification is to limit the size of losses and increase long-term returns. Index funds are a highly effective vehicle for diversification.

Divestment

Divestment, also known as divesture, means selling an asset or subsidiary.

It is the opposite of investment. Companies may divest assets to raise money, limit losses from a poorly performing asset or division, or focus more closely on their core goals. Divestment can also have financial or political aims.

Dividend

A dividend is a portion of a company’s profits that is paid out to its shareholders rather than being retained and reinvested to grow the business. This payment can be made in cash or shares. The directors of a company make decisions about dividends (whether to distribute them, and how much to pay out). In some cases, dividends are only paid out to a certain class of shareholders rather than to all shareholders.

In the United Kingdom, dividends over a certain threshold (£2,000 for the 2021-2022 tax year) are subject to income tax.

Dividend per Share

Dividend per Share (DPS) is a figure calculated by adding up all dividends paid out by company and dividing it by the total number of ordinary shares that have been issued. Special dividends, which are exceptional, one-time payouts, are not included in the calculation.

DPS is important because it tells a shareholder how much income they earn from owning a stock. It can also be tracked over time to glean information about a company’s health and growth.

Dividend Yield

The dividend yield is the ratio of the annual dividend paid out on each share of stock to the price of each share of stock. It is expressed as a percentage, and it represents a stock’s dividend-only return.

Investors should use this metric in conjunction with others when evaluating a stock, as a high dividend yield does not always signal an investment that will perform well. Since the denominator of the dividend yield equation is the stock price, companies with plummeting stock prices can show high dividend yields, but in this case, the high dividend yield could be a sign of struggling performance.

Also, high dividend payouts relative to stock price can sometimes mean a company is not reinvesting money to optimize business growth.

Dow futures

Dow futures are a type of derivative, which is a financial instrument that is based on the performance of an underlying asset. Under Dow futures contracts, investors agree to buy or sell the index at a set price on a future date. Dow futures allow investors to speculate on or hedge against price fluctuations on the Dow Jones Industrial Average, which is an index of 30 stocks in major US companies.

Dow Jones Industrial Average

The Dow Jones Industrial Average is an index of 30 stocks in major US companies and is one of the oldest and most closely-followed indexes in the world. Financial analysts use it to determine the robustness of the stock market and the U.S. economy as a whole, along with other popular indexes like the S&P 500.

The index is calculated by adding together the stock price of all firms on the index and dividing it by 30 (the number of firms on the index). The thirty stocks on the index are chosen as the most representative publicly-traded companies in their respective industries.

Due Diligence

Due diligence is a process potential purchasers undertake to thoroughly investigate a business deal or investment before moving forward with it. The purpose of this process is to assess the commercial potential of a deal, confirm facts to ensure the suitability of the transaction for the buyer, and/or satisfy a legal requirement. Those performing due diligence before taking a position in a new stock may look at factors like a company’s market capitalization, revenue, competitors, valuation multiples, and management, as well as the stock’s historical performance and risks.

Dumping

Dumping involves artificially lowering the price of an export to below its value on the domestic market, and sometimes to below what it costs to produce the export, in order to flood a foreign market with the product and overshadow the competition. Once competition has been diminished, the dumping entity can then raise its prices and recover what it spent to gain such a large market share. Under World Trade Organization rules, dumping is legal unless harm to domestic producers attributable to dumping can be demonstrated. Most countries protect themselves from dumping through quotas and tariffs.