A portion of the company’s earnings paid to shareholders. Dividends are either distributed to stockholders as cash (cash dividends) or stock (stock dividends). A company’s board of directors determines the amount of dividend that will be paid. Companies that have matured beyond the growth phase are more likely to pay out dividends, as growth companies usually prefer to reinvest their profits.


An investment strategy where an investor holds a variety of investments to reduce the volatility and risk of a portfolio. Investment funds are divided between different types of securities, companies and industries that are unlikely to gain or lose value at the same time. Diversification reduces unsystematic risk, i.e., risk that is not intrinsic to the market.

Defined contribution plan

An employer-sponsored plan where the employer promises to contribute a specific amount or percentage of money each year on behalf of participating employees. 401(k) plans and 403(b) plans are types of defined contribution plans.

Defined benefit plan

An employer-sponsored retirement plan that promises a certain benefit amount to employees. The amount promised to be paid on retirement is calculated based on factors such as salary history and years of service.

Debt to income ratio

A figure that compares an individual’s debts to his or her income. The higher the ratio, the more of a person’s income is allocated to paying off debts. Lenders often use the debt to income ratio to determine how likely a person is to pay back a loan.