Glossary of terms used on this site

Although they may look like credit cards, debit cards are different in one important way: When you use a debit card, the cost of the purchaseis deducted from your checking account. Thus, a debit card gives you the convenience of a credit card without the danger of building up a mountain of consumer debt.

Default is the failure to repay a debt including interest or principal on a loan or security. A default can occur when a borrower is unable to make timely payments, misses payments, or avoids or stops making payments. Individuals, businesses, and even countries can fall prey to default if they cannot keep up their debt obligations. Default risks are often calculated well in advance by creditors.

An investment instrument whose value is derived from other securities. For example, the value of an option to buy IBM stock is derived from the price of IBM’s stock.

If you put all your money into one type of investment, you’re potentially setting yourself up for a big shock. If that investment collapses, so does your investment world. By spreading (diversifying) your money among different investments — bonds, stocks, real estate, and so on — you ensure yourself a better chance of investing success and fewer sleepless nights.

The dividend is the income paid to investors holding an investment. With stock, the dividend is a portion of a company’s profits paid to its shareholders. For example, if a company has an annual dividend of $2 per share and you own 100 shares, your total dividend is $200. Usually, established and slower-growing companies pay dividends, while smaller and faster-growing companies reinvest their profits for growth. For assets held outside retirement accounts, dividends (except from tax-free money market and tax-free bond funds) are taxable.

Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. Although it is one of the most commonly followed equity indices, since it only includes 30 companies and is not weighted by market capitalization and is not a weighted arithmetic mean, many consider the Dow to not be a good representation of the U.S. stock market and consider the S&P 500 Index, which also includes the 30 components of the Dow, to be a better representation of the U.S. stock market.

The part of the purchase price for a house that the buyer pays in cash upfront and does not finance with a mortgage. The larger the down payment, the smaller the mortgage amount and often the lower the interest rate. You can usually get access to the best mortgage programs with a down payment of at least 20 percent of the home’s purchase price.

Due diligence is an investigation or audit of a potential investment or product to confirm all facts, that might include the review of financial records. Due diligence refers to the research done before entering into an agreement or a financial transaction with another party.