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At a Discount Definition
“At a discount” is a term that refers to a situation in which a stock is traded at a price below its regular price or par value. When a security is sold below the current market value or sold below its nominal price, the security is trading ‘at a discount.’
The face value or par value of a security is its nominal price, it is the minimum price of a security as contained in the company’s charter. This means, in an initial public offering, a security is not expected to be sold below its par value. When a security is being sold at a price below its par value, it is trading “at a discount.”
A Little More on What is At a Discount
The market price of securities do not affect their nominal price. A security’s nominal price or par value is the least price the management of a company has agreed to sell it at an IPO, this price is detailed in the charter of the company. However, in many cases, stocks of companies are not issued at their face value, while some companies issue stocks ‘at a premium’, other companies issue the stocks ‘at a discount.’ When a company sells its stock below the nominal value or sometimes below the market value, it is trading at a discount.
Why There Are Restrictions on Shares Sold at a Discount
There are certain effects that selling ‘at a discount’ has on a company and in extension to the creditors of the company. For instance, selling at a discount reduce the capital strength of a company and this in turn leaves the company in debts and defaults. Investors or shareholders who but stock that are sold at a discount are also exposed to the risk of contingent liability. There are certain measures put in place to restrict selling at a discount. This offers protection to the creditors of the company. Despite the laws and regulations against trading at a discount, there are some exceptions to selling at a discount such as employees of a company who purchase the shares of the company at a discount.
Reference for “At a Discount”
Academics research on “At a Discount”
The private company discount, Koeplin, J., Sarin, A., & Shapiro, A. C. (2000). The private company discount. Journal of Applied Corporate Finance, 12(4), 94-101.
Forward discount bias: Is it an exchange risk premium?, Froot, K. A., & Frankel, J. A. (1989). Forward discount bias: Is it an exchange risk premium?. The Quarterly Journal of Economics, 104(1), 139-161. A common finding is that the forward discount is a biased predictor of future exchange rate changes. We use survey data on exchange rate expectations to decompose the bias into portions attributable to the risk premium and expectational errors. None of the bias in our sample reflects the risk premium. We also reject the claim that the risk premium is more variable than expected depreciation. Investors would do better if they reduced fractionally the magnitude of expected depreciation. This is the same result that many authors have found with forward market data, but now it cannot be attributed to risk.
Estimating individual discount rates in Denmark: A field experiment, Harrison, G. W., Lau, M. I., & Williams, M. B. (2002). Estimating individual discount rates in Denmark: A field experiment. American economic review, 92(5), 1606-1617.
Investment and discount rates under capital rationing–a programming approach, Baumol, W. J., & Quandt, R. E. (1965). Investment and discount rates under capital rationing–a programming approach. The Economic Journal, 75(298), 317-329.
Is there a diversification discount in financial conglomerates?, Laeven, L., & Levine, R. (2007). Is there a diversification discount in financial conglomerates?. Journal of Financial Economics, 85(2), 331-367. This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values of financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, are lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates engaged in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium.