FinanceTalking Financial Glossary

Deferred Acquisition Cost. In life insurance, there is a substantial up-front cost to getting new business ? eg commissions and fees and advertising costs. This cost relates to a long-term policy. So accounting rules require the cost to be spread over the life of the contract, rather than deducted it from profits immediately. Accountants refer to acquisition cost as being 'deferred' or 'capitalised' ? ie it is treated as an asset and depreciated (amortised) over the period of the contract. If acquisition costs were not treated like this, all contracts would be loss-making in the first year. The DAC is a way of spreading the cost of acquiring new business over time. This helps to match the cost with the benefit over time so that the annual profit is more realistic.

An investor or company instructs a broker to buy all the shares available in another company as soon as stock market opens, usually before the target company knows that it is a target. The aim is usually to acquire a significant stake in a company with a view to making a takeover bid.

The main benchmark index of the Deutsche B?rse.

A defined benefit pension scheme is where the company agrees to fund a pension which is defined as a % or a multiple of the employee's final or average salary. The investment risk here is with the company.

A defined contribution pension scheme is where the company (and/or the individual) agrees to contribute a % of the employee's salary to a fund. The investment risk is with the saver.

Discounted Cash Flow. DCF techniques are used to value investments. The cash flows associated with the investment are projected out into the future and discounted back to present day value. In theory, the maximum that an investor would pay for an investment is the present value of the future cash flows that will be received. DCF is useful because it gives an absolute valuation (rather than a valuation relative to other companies). This technique is used for valuing companies, acquisition targets and commercial property. It is also used in project appraisal (you may have come across the term NPV which means net present value ? ie present value after deducting the cost of the investment). There are problems with DCF ? it is very subjective and very susceptible to the assumptions that you make ? particularly to the discount rate and to the growth rate assumed in the continuing period. There are problems with DCF ? it is very subjective and very susceptible to the assumptions that you make ? particularly to the discount rate and to the growth rate assumed in the continuing period.

A temporary recovery on a stock exchange after a substantial fall, which does not imply a reversal of the downward trend.

A trader of any kind. Also refers to a person who acts as principal, such as a market maker on a stock exchange, rather than a broker.

A long-term loan. A debenture is normally repayable at a fixed date (although some debentures are irredeemable securities - called perpetual debentures). Most debentures pay a fixed rate of interest and the loan is often secured on assets.

Debt or borrowings are all the company's interest-bearing creditors (overdrafts, loans, bonds etc).

Agencies such as Moody's and Standard & Poors rate corporate bond issues so that investors can assess how likely they are to receive interest and capital repayments. The highest rating is usually AAA and the lowest is D (in default).

A bond or loan note issued by a borrower to an investor (lender). There are two main categories of bond: government and corporate. In the UK, Government bonds are referred to as Gilts. Interest payments on bonds are made twice a year. Bonds are also referred to as fixed interest securities because the interest is paid at fixed six-monthly intervals.

The number of days sales owing by customers at the balance sheet date.

Amounts owed to a company at a point in time by customers etc. Also known as receivables.

A bond paying no interest. The bond is issued at a substantial discount to its redemption value, providing a large capital gain in place of interest. The capital gain really represents the rolled up interest.

A borrower defaults on the terms of a loan if he/she fails to meet interest or capital repayments.

Shares are described as defensive if they are not particularly susceptible to the economic cycle.

An asset which will not convert into cash in the short term.

A type of ordinary share on which dividends are not paid until a specified date or event or until after all the ordinary shares have received their dividend.

A provision for tax in the accounts of an organisation that will become payable in a future period.

A defined benefit pension scheme is one in which the company defines the benefits that will accrue to members on retirement (often a number of times or a percentage of final salary). If the invested fund performs badly, the company must make additional contributions, whereas if the fund does well and there is more than enough money to meet the benefits promised, the surplus belongs to the company. Many defined benefit (final salary) schemes are now closed to new members, and companies are offering defined contribution schemes instead.

A defined contribution pension scheme is one in which the company defines the contributions that it will make on behalf of members. The amount that members receive on retirement will entirely depend on the amount contributed and the investment returns over the employee's working life. If the invested fund performs badly, the employee's pension will be lower, whereas if the fund does well, the pension will be higher - the risk is with the employee. Until the last decade, most pension schemes were defined benefit (final salary) schemes. However, most of these schemes are now closed to new members, and companies are offering defined contribution schemes instead.

Delisting refers to the process by which a company's shares are delisted from a stock exchange so that they can no longer be traded through that market mechanism.

Organisations whose main function is to take deposits - this is the basis for the legal definition of a bank.

In accounting, the cost of assets is deducted from profits in instalments, over the life of the assets, by way of depreciation. Depreciation reduces assets and reduces profits on a systematic basis over the asset's life.

A futures or options market.

Financial instruments which derive from basic products and markets. For example, options and futures are derivatives of shares, bonds, currencies etc.

A planned reduction in the level of stock/inventories.

Usually refers to an increase in the number of ordinary shares in a company without a corresponding increase in its assets or profitability.

An increase in the number of ordinary shares in a company without a corresponding increase in its profitability.

An increase in the number of ordinary shares in a company without a corresponding increase in its assets or profitability.

An increase in the number of ordinary shares in a company without a corresponding increase in its net assets (assets less liabilities).

If an acquisition is dilutive, it reduces earnings per share.

Costs which can be directly attributed to a product ? such as product specific advertising.

A person appointed to carry out the running of a company. Executive directors are in charge of running the company from day to day. Non-executive directors act in an advisory capacity and look after the interests of the shareholders.

An annual report by the directors of the company to its shareholders, which forms part of the company's annual report and accounts.

The DTRs form part of the UKLA rules for companies which are listed on the London Stock Exchange. They deal with the disclosure of inside information, regular financial reporting, disclosing certain share dealings and the requirements for insider lists.

Future receipts and payments are discounted to their present values by applying discount factors, taking account of interest that could be earned for the relevant years to the date of payment or receipt.

The rate of interest charged by the US Federal Reserve Banks when lending to other banks.

In the financial markets, news is said to have been discounted when it has already been taken into account in the pricing of securities ? and prices do not therefore move when the news is announced. See also discounted cash flows.

Discounted Cash Flow. DCF techniques are used to value investments. The cash flows associated with the investment are projected out into the future and discounted back to present day value. In theory, the maximum that an investor would pay for an investment is the present value of the future cash flows that will be received. DCF is useful because it gives an absolute valuation (rather than a valuation relative to other companies). This technique is used for valuing companies, acquisition targets and commercial property. It is also used in project appraisal (you may have come across the term NPV which means net present value ? ie present value after deducting the cost of the investment). There are problems with DCF ? it is very subjective and very susceptible to the assumptions that you make ? particularly to the discount rate and to the growth rate assumed in the continuing period. There are problems with DCF ? it is very subjective and very susceptible to the assumptions that you make ? particularly to the discount rate and to the growth rate assumed in the continuing period.

Discounting is the opposite of compounding. It involves reducing an amount by the interest it would have earned in an equivalent investment, to see what the amount would be worth at present day values.

The elimination of financial intermediaries, such as brokers or bankers, from transactions between borrowers and lenders or buyers and sellers in financial markets.

The profit of a company that is legally available for distribution as dividends.

The retained profits of a company that it may legally distribute by the way of dividends.

The spreading of an investment portfolio - for example, over a wide range of companies to avoid serious losses if a recession is localised to one sector of the market.

The distribution of part of the net income (profit after tax) of a company to its shareholders.

The number of times a company's dividends to ordinary shareholders could be paid out of its profits after tax in the same period.

Discounted cash flow techniques are used to value investments. The cash flows associated with the investment are projected out into the future and discounted back to present day value. In theory, the maximum that an investor would pay for an investment is the present value of the future cash flows that will be received. A dividend discount model forecasts the cash flows to shareholders (ie the dividends) and discounts them back to present day values to give the value of the share today.

The dividend (income) from a share expressed as a percentage of the price of that share.

The benchmark index for the New York Stock Exchange.

A profit warning issued by a company is referred to as a downgrade. This might lead investment analysts to 'downgrade' their forecasts for the company's future profits.

Dividend per share. The full dividend (both interim and final dividend) divided by the number of shares in issue.

Day's sales outstanding (debtor days). The number of days sales owing by customers at the balance sheet date.

The Disclosure and Transparency Rules. The DTR form part of the UKLA rules for companies which are listed on the London Stock Exchange. They deal with the disclosure of inside information, regular financial reporting, disclosing certain share dealings and the requirements for insider lists.

When a security is traded on more than one stock exchange.

The process of investigation prior to and during a transaction covering commercial, legal, financial (incl. tax), technology issues etc.