Dilution To Due Diligence (Money)


You take ten lemons and squeeze them, diluting with… This is not Delia Smith’s cookery topic? Sorry about that folks, I must remember we are on the riveting subject of finance. Dilution might be good for Delia, but I’m afraid it’s not good news in the financial sense. This can happen to a shareholder when a company issues more shares in itself by way of a rights issue. If you’ve got shares in that company, and you don’t take up your rights, your holding, post-rights issue, will be smaller in proportion to what it used to be, ie, it will be diluted (see Rights Issue).


Did somebody say discount? Am I going to get a good deal for once in my life? Don’t get too excited. This is yet more City-speak. When the stock market discounts the future, it doesn’t necessarily mean that share prices are getting cheaper. Discounting is the term City folks use to describe the market’s anticipation of future events. When shares rise, the market is discounting a rosy economic outlook, and when they drop, the market is discounting bad times ahead.

An alternative meaning for this word is when a share is standing at a discount to its net asset value. This means that the company has assets worth more than its total value on the Stock Exchange (see Investment Trust, Net Asset Value per Share).

Discount Broker

This phrase has two meanings. For most of us it describes the bare essentials, no-frills dealing service offered by stockbrokers to those of us who know exactly what shares we want to buy and sell. They do the bargains (transactions) at a bargain! (See Execution Only.)

The other use for this term is when discount brokers, operating from discount houses, sell bits of paper called bills that are effectively IOUs. They are issued by companies needing to borrow large sums of cash for a short period of time, such as six months. The bills (similar to, but not the same as bonds) offer a fixed income stream and are also known as short-term promissory notes. The reason why the word discount features so prominently in this context is that the bills are offered at a discount to their actual value, which acts as an incentive to persuade lenders to part with their cash. There is a whole market out there for short-term company paper, and these types of investments are predominantly bought and sold by the big players, ie, the institutions. They are not so suitable for the individual investor.

Discounted Cash Flow

This is the complicated mathematical calculation that works out the value today of money received tomorrow. Let me enlighten you – one pound in the hand now is worth more than two in the bush later, or am I mixing my metaphors? Anyhow, the reason why City folks like to do this calculation is because they argue that money received in the future won’t be worth as much as it is now. Why? The usual arguments: inflation erodes the value of money and if you had it in your sweaty palm now, you could pop it into the building society and it would be earning interest this very minute. Of course, if you had the money in your hand now, you would be absolutely certain of receiving it! (See Present Value of Money.)

Discount House

A company that buys bills at a discount (see Discount Broker). Only a few discount houses qualify to be an ‘accepting house’, the term that describes an old-fashioned club of companies that were given regulatory approval to borrow money at reduced rates of interest.

Discretionary – Dealing, Portfolio Management

Basically when you hand your money to stockbrokers or fund managers on a discretionary basis, you are effectively giving them total control to do with it what they see fit. They have free rein to invest it in shares, bonds, etc and de-invest from shares, or whatever. To trust someone to that extent, you should be absolutely certain that they have an ace track record. Be sure in your own mind that these people are competent and up to the job. Discuss with them at great length what you want to achieve and the level of risk you are willing to take on, or you could end up wishing you’d left your money in the boringly dull, but safe building society deposit account! (See Association of Private Client Investment Managers, Churning, Stockbroker.)


Inflation is when prices rise. Deflation is when prices fall. Disinflation is when the actual rate of price rises slows down. This is the government’s favourite scenario. As soon as they feel inflation is getting out of control, they implement deflationary measures (like raising interest rates or increasing taxation) in order to achieve disinflation (see Fiscal Policy, Monetary Policy).

Distribution Funds

Often collective funds are marketed as being specialized in one area, such as ‘growth’ or ‘income’ to suit the different needs of investors. ‘Distribution’ funds invest in shares and bonds with a view to delivering to investors a combination of both these elements, ie, ‘growth’ and ‘income’, in one (see Active Management, Collective Funds, Growth Funds, Income Funds, Investment Trust, Managed Funds, Unit Trust).


In financial terms, diversification is spreading money over a wide range of assets. You probably already instinctively know the reason why people diversify. They do it to spread risk, ie, lessen the chances of losing all their money in one hit by not putting their proverbial eggs into one basket. Obviously the more money you have, the easier it gets to diversify. Many people like to entrust their savings with the bods, ie, the institutions that are professionally paid to manage the collective savings of lots of individuals like us (see Asset Allocation, Managed Funds). It’s much harder for us to spread our money as widely as they do. But before you get too despondent, cheer up. You, too, can diversify your assets in your own way. Big items generally take precedence, so it’s obviously a good thing to own a place of your own to rest your tired head. And then spare cash should be spread over a handful of assets, some into shares, some into unit trusts, maybe some antiques, etc. And of course, always have some emergency money put away for the unwelcome event of a horrible mishap.


The money a company pays out to its shareholders from the profits it has made. If you’ve got shares in British Gas or whatever, you’ll receive a dividend cheque (most likely two per year – an interim dividend and a final one). With the cheque comes an innocuous little detachable slip called a tax voucher that you need to file away neatly for that joyous time when you do your tax return (see Tax Return).

Dividend Cover

Anything with cover in the phrase means ‘How safe is it?’ Dividend cover checks out how many times over a company could pay out its dividend all at once, if it chose to do so. It is a terribly easy calculation that City bods do to ascertain just how safe the future dividend payout is:


Obviously the higher the number, the more secure the dividend payout to shareholders. If the dividend isn’t covered, then shareholders had better start worrying.

Dividend Yield

You arrive at this by yet another terribly easy calculation:


By now you know that yield is simply the return you get for your original outlay of cash into something, whether it is shares or any other type of investment. So what’s so special about the dividend? Well, apart from profits, the dividend is another key indicator that shows how well a company is doing. In general, dividends tend to rise when a company is doing well and vice versa. Numbers like these are much simpler to follow for larger companies, because they are easier to predict. Get into smaller companies and the outlook is much more uncertain, and returns are more volatile. City analysts get absorbed in ‘divi’ yield because it gives an indication of the returns investors are likely to get in the future when they invest their money in the shares of a particular company.

The historical dividend yield (based on what the company has paid out in the past) is just an indication of what it may pay in the future. It doesn’t guarantee anything. As City folks set great store by what the future holds, they obviously do their utmost to do the whole crystal ball thing and predict what the dividend will be next time round (called the prospective dividend yield). When they get it right, they pat themselves vigorously on the back, and when they get it wrong, naturally it was the company’s fault, as they didn’t give the analyst enough information to go on! Incidentally, a low dividend doesn’t necessarily mean that there is a problem if a company is making loads of juicy profits and reinvesting these in lucrative areas of business. Rather perversely, a high dividend can mean that a company is in trouble (see Growth Shares, High-Yield Shares, Yield).


A dog is a dud share. It is usually the share that a good ‘friend’ tipped you to buy. Admit it, we all fall for the oldest trick in the topic, which is invariably, that by the time someone is tipping a share to us, the rest of the world is piling out of them. The dog has been sitting in your portfolio for years, and you’ve always refused to sell it in the conviction that one day, it will rise in value. And very occasionally, luck strikes and it does. The lovely City expression – every dog has its day – describes the sheer luck of seeing the worst performing share in your portfolio resurrected, like Lazarus. What could catalyse this? Well, if a share performs diabolically for long enough, a predator might come out of the woodwork and gobble it up. If you’re unlucky, though, the dog could equally exhibit rigor mortis and throw all four paws in the air!

Dow Jones 500 – DJ 500

This is an index that tracks the fortunes of America’s 500 largest companies and it is a good barometer of the overall US economy, certainly more so than the Dow Jones Industrial Average. Since the American stock market is the most important in the world, all eyes in the City are firmly fixed on it every day. Our own UK stock market is much smaller in comparison, but it is still the fifth largest one in the world after the United States, France, Germany and Japan (see Dow Jones Industrial Average – DJIA, Footsie – FTSE 100, Index).

Dow Jones Industrial Average -DJIA

The DJIA follows the fortunes of 30 top American industrial companies, with world-famous names such as IBM and Coca Cola. Although they are not necessarily the largest companies by value (Bill Gates’s Microsoft is actually on NASDAQ: see NASDAQ), it is the index all eyes turn to when trying to guess the future. ‘Did you see the Dow today? Up 30 points. Do you think it’s going to crash?’ ‘Naah. Going to the moon, it is.’ Oft-repeated conversation between two wide-boy traders trying to guess what the long term holds (which for them is the next five minutes!).

Drip Feeding

Something you’ll need when you collapse in horror at realizing how much money you’ve lost in emerging markets. The true City version is the sensible policy of dripping your money into markets, unit trusts, or whatever little by little. Sort of toe-in-the-water strategy. If you get a headache at the mere thought of putting your hard-earned cash into stocks and shares, this approach to investing makes life easy for you as all it requires is that you pop a small amount of money, say £50-100 a month into a fund or funds of your choice over a long period of time. It is a sensible strategy for those people who simply cannot watch the markets closely enough to make sound judgements about market timing, ie, when to get in and when to get out. Look on the bright side: if the markets keep plunging, the money paid in will be buying more on each downward leg. Of course it all balances out, because in a rising market, it buys less (see Regular Savings Plan).

Dual Capacity

This is when a City firm has more than one function (see Single Capacity). For example, it can be an agency stockbroker, dealing on behalf of its clients, as well as acting as a market-maker, which means buying and selling shares for its own account or acting as ‘principal’ (see Principal). As the firm is not acting purely as an agent for its clients, but buys and sells shares for its own ‘topic’, a potential conflict of interest could arise. An example: a client comes along and wants to buy some shares. The dual capacity firm has loads of Beeswax plc shares on its topics. It doesn’t take a genius to work out which shares might be recommended to the client and where they could come from. Naturally these firms vigorously protest in horror at the merest suggestion that any improper dealings ever take place. We’ve got Chinese walls they cry (see Chinese Walls), no way will there be any conflict of interest. Hmmm.

Due Diligence

When one company is mulling over the possibility of buying another company, it obviously has to check over all the aspects of the potential target, especially its finances. So it appoints an investment bank’s corporate finance department to do all the gruelling hard work of checking the target out thoroughly to make sure there are no nasty glitches or surprises. Due diligence includes working with outside lawyers and accountants to make sure that the target’s accounts and actual business are what they purport to be (see Corporate Finance, Investment Bank, Mergers & Acquisitions).

Next post:

Previous post: