What is At a Discount?
"At a discount" is a phrase used to describe the practice of selling stocks, or other securities, below their current market value, similar to a sale of goods at a retail establishment.
- "At a discount" is a phrase used to describe the practice of selling stocks, or other securities, below their current market value.
- A stock might be described as trading "at a discount" compared to its target price, or a previous close, if the market value dropped, but there is some expectation that it could rise again.
- Companies make it is possible for employees with certain stock options to purchase shares at a discount, if they were granted the options early enough.
Understanding At a Discount
In the field of investing, "at a discount" refers explicitly to stock that is sold for less than its nominal or par value. 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 in an initial public offering (IPO). Most states have laws preventing companies from issuing stock at a price less than par.
The par value of a stock has no relation to its market price. 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 had 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.
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 these instances, the market value may have 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.
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 of a company from any potentially negative effects that such discounts might have. By selling shares below market value, a company’s capitalization could be compromised, leaving 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.