Discounting Mechanism

DEFINITION of 'Discounting Mechanism'

The premise that the stock market essentially discounts, or takes into consideration, all available information and present and potential future events. When unexpected developments occur, the market discounts this new information very rapidly. The Efficient Market Hypothesis (EMH) is based on the hypothesis that the stock market is a very efficient discounting mechanism.

BREAKING DOWN 'Discounting Mechanism'

The fact that the stock market is essentially a discounting mechanism explains the wild swings in stock indexes following unexpected events such as a natural disaster or a terrorist attack, or an earnings miss in the case of an individual stock. The efficiency of the stock market as a discounting mechanism has been vigorously debated over the years. Economist Paul Samuelson, attempting to show that equity markets do not always get it right, famously remarked in 1966 that "Wall Street indexes predicted nine out of the last five recessions."

RELATED TERMS
  1. Price Efficiency

    The premise that asset prices are efficient, to the extent that ...
  2. Weak Form Efficiency

    One of the different degrees of efficient market hypothesis (EMH) ...
  3. Semi-Strong Form Efficiency

    A class of EMH (Efficient Market Hypothesis) that implies all ...
  4. Market Efficiency

    The degree to which stock prices reflect all available, relevant ...
  5. Informationally Efficient Market

    A theory, which moves beyond the definition of the efficient ...
  6. Efficient Market Hypothesis - EMH

    An investment theory that states it is impossible to "beat the ...
Related Articles
  1. Active Trading Fundamentals

    Efficient Market Hypothesis: Is The Stock Market Efficient?

    Deciding whether it's possible to attain above-average returns requires an understanding of EMH.
  2. Active Trading

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  3. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  4. Investing Basics

    The Upside of Picking Stocks Nobody Follows

    Learn about the upside of picking stocks nobody follows. The less followed a stock, the more opportunity there is for a stock being incorrectly priced.
  5. Trading Systems & Software

    Mechanical Investing Not A Golden Key

    Direct paths to wealth are getting narrower, fewer and may be locked up tight.
  6. Investing Basics

    Discounting With The Discount Rate

    The discount rate is the interest rate you need to earn on a given amount of money today to end up with a given amount of money in the future. Let's say you need $1,000 one year from now to go ...
  7. Active Trading Fundamentals

    Hypothesis Testing in Finance: Concept & Examples

    When you're indecisive about an investment, the best way to keep a cool head might be test various hypotheses using the most relevant statistics.
  8. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  9. Economics

    The Efficient Market Hypothesis: Settling the Great Debate

    An understanding of neuroscience and the decision-making process provides a resolution to the decades-old debate between proponents and critics of the Efficient Market Hypothesis.
  10. Retirement

    Benefit From Senior Discounts

    Older people can save a surprising amount using senior discounts. With Social Security payments flat for next year, this is the time to start using them.
RELATED FAQS
  1. What are the primary assumptions of Efficient Market Hypothesis?

    Find out about the key assumptions behind the efficient market hypothesis (EMH), its implications for investing and whether ... Read Answer >>
  2. What does the efficient market hypothesis assume about fair value?

    Found out what the efficient market hypothesis says about the fair value of securities, and learn why technical and fundamental ... Read Answer >>
  3. What does the Efficient Market Hypothesis have to say about fundamental analysis?

    Find out what the efficient markets hypothesis has to say about fundamental analysis and how recent finance research has ... Read Answer >>
  4. Has the Efficient Market Hypothesis been proven correct or incorrect?

    Explore the efficient market hypothesis and understand the extent to which this theory and its conclusions are correct or ... Read Answer >>
  5. Why does the efficient market hypothesis state that technical analysis is bunk?

    Learn about why there are strong conceptual differences between the efficient market hypothesis and technical analysis about ... Read Answer >>
  6. What is an efficient market and how does it affect individual investors?

    When people talk about market efficiency they are referring to the degree to which the aggregate decisions of all the market's ... Read Answer >>
Hot Definitions
  1. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  2. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS ...
Trading Center