Discounting Mechanism

AAA

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.

INVESTOPEDIA EXPLAINS '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. Efficient Market Hypothesis - EMH

    An investment theory that states it is impossible to "beat the ...
  2. Random Walk Theory

    The theory that stock price changes have the same distribution ...
  3. Dow Theory

    A theory which says the market is in an upward trend if one of ...
  4. Market Efficiency

    The degree to which stock prices reflect all available, relevant ...
  5. Black Swan

    An event or occurrence that deviates beyond what is normally ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value ...
Related Articles
  1. thinkstock|istock
    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?
  2. What is the impact of research on stock prices?
    Investing Basics

    What Is The Impact Of Research On Stock Prices?

    The answer to this question is directly related to the importance of information in the marketplace.
  3. Investing Basics

    Is Stock Picking A Myth?

    Find out if mutual fund managers can successfully pick stocks or if you're better off with an index fund.
  4. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  5. 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.
  6. Trading Strategies

    How effective is creating trade entries after spotting an Exhaustion Gap pattern?

    Understand the components of the exhaustion gap pattern, how and why it occurs, and how it can be used to create an effective trading strategy.
  7. Chart Advisor

    Is It A Breakout? See The Point-And-Figure Chart

    These stocks have broken out of a triple top formation using point-and-figure charting, a bullish sign.
  8. Chart Advisor

    A Multi-Asset Income ETF For Defensive Investors

    In light of market volatility and worries that stocks are overbought, one product worth noting is the Guggenheim Multi-Asset Income ETF.
  9. Chart Advisor

    These Stocks Offer Range-Trading Opportunities

    These stocks are trading in ranges (or were recently) and present opportunities to buy at support or short sell at resistance.
  10. Investing has its ups and downs, but financial advisers can do much to prepare their clients and their clients' portfolios for such volatility.
    Investing Basics

    How Advisors Can Help Clients Stomach Volatility

    Investing has its ups and downs, but financial advisers can do much to prepare their clients and their clients' portfolios for such volatility.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center