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DURATION

This captures the sensitivity of the price of a fixed income security to a change in interest rates, all in one number. Two of the factors that influence bond prices are general interest rates and the time remaining until the security is redeemed, or bought back. A security with a high duration is usually more …

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DISCOUNT RATE

One pound today is worth one pound. But what is one pound received in one year worth now? The answer depends on interest rates in the meantime. If interest rates are 10% one pound now could be invested to earn 10p over a year so that pound – which will be worth 110p – is …

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DEFLATION

In a growing economy investors normally expect to see inflation – rising prices. However when economic growth stalls the opposite is possible – deflation. This is where the overall cost of a typical basket of goods and services, measured in the US and Europe using the Consumer Prices Index, drops. This might sound like a …

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DISCRETIONARY TRUST

This is a type of trust where the trustees have a choice (discretion) about how to use the income of the trust and sometimes the capital too. Typical holdings within these trusts can include cash, land or buildings and other investments. The reasons for setting one up vary but examples would include wanting to set …

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DEPRECIATION

If a firm acquires a big asset such as a factory, it will expect to use it for many years to help it to generate revenue. The question then arises as to how to treat the initial cost, say £1m. Depreciation is the process whereby the cost of the asset is spread over the years …

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DIVIDEND

Firms that make profits have two choices – they can either keep them and reinvest them in the hope of making more profits or pay them out to shareholders as a dividend. Let’s say a firm makes profits of 10p per share, it might decide to pay out 2p per share as a dividend. This …

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DIVIDEND COVER

An important question for a shareholder relying on dividends is whether a firm will be able to afford to carry on paying them in the future. One measure of this is dividend cover. This is the number of times the profit available to pay a dividend actually covers the dividend paid. So for example if …

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DELEVERAGING

Firms and other organisations that carry a lot of debt funding are said to be leveraged. It means they are quite exposed if their cost of borrowing increases. At times of financial stress these firms have to find a way to reduce their exposure to debt and this process is known as deleveraging. When this …

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DERIVATIVE

In very simple terms a derivative is an instrument that derives its value from another one. There are three basic types – the future, the option and the swap. These tend to be used by mainly institutional clients. For a retail investor the nearest thing to a future is a spread bet. This allows you …

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DISCRETIONARY STOCKBROKING

Here a broker has the power to help you create a tailored portfolio and to make investment decisions on your behalf. Investors who don’t have the time, inclination or expertise to make their own investment decisions often use a discretionary service. READ MORE