What is At a Discount
The phrase "at a discount" specifically refers to stock that is sold for less than its nominal or par value. It also refers to stocks or other securities that are sold below the present market value, similar to a sale on goods at a retail establishment.
The nominal or par value for a security, which is detailed in the company charter, is the minimum price that a stock of a particular class can be sold for upon an initial public offering. Most states have laws preventing companies from issuing stock at a price less than par.
BREAKING DOWN At a Discount
The nominal or par value of a stock arguably has no relation to the market price. In fact, many stocks today are not even issued with a par value, and those that are often have values that do not in any way relate to the issuing price. For example, in 2012, Google's convertible preferred shares have a par value of $0.001 per share. Selling a stock below market value, on the other hand, is far more common and is typically done as a means of enticing buyers or creating buzz.
Why There Are Restrictions on Shares Sold at a Discount
Legal restrictions on selling at a discount were put into effect in part to better protect the creditors to the company because of the effect that such discounts could have. By selling shares below market value, a company’s capitalization could become deficient and leave it with a shortage of assets to pay its debts should the company lapse into default. Further, if shares are sold at a discount, those shareholders who buy the stock may face contingent liability to the creditors for the difference in price.
There are separate instances and contexts where a stock might be described as at a discount compared to its target price or a previous close. In such cases, the market value has dropped as part of the trading day cycle, but there is some expectation that it could rise again. Furthermore, it is possible for employees with certain stock options to purchase shares at a discount if they were granted the options early enough. The market value of the shares may have increased during the time it took for the options to become fully vested, but the employee is allowed to purchase the allotted shares at that lower price. In these examples, there is no legal barrier to the purchase and sale of such shares for a profit.