Discount: the What is it and what does it mean?

In the world of finance, several terms appear and raise questions for those just starting out in this field. Therefore, it's important to understand each of them to ensure you're on the right track.

And one of the terms that always comes up is "discount." Do you know what it means? And why is it important to understand it within the financial and economic context?

In this article, we'll answer your questions and show you what a discount is.

What is a discount?

Discounts can appear in a variety of contexts. And that's why they can have different meanings, depending on what's around them.

In general terms, a discount is an amount charged below the nominal value of a product, such as a property, or the amount paid less in a financial transaction, such as purchasing securities or investing.

Thus, according to this context, when referring to the discount, there is a reference to this lesser amount that will be paid, that is, a type of discount on the nominal value of the product or service in question.

Premium and Discount, what is it?

When discussing discount, it's common to also refer to premium, which is the opposite term. Simply put, both terms are interconnected and convey meanings within the transaction in which they are proposed.

Premium is a term used when a commodity or financial transaction is being traded at a price above its reference value. In other words, when we say an asset is at a premium, it means its acquisition price exceeds its market value.

Discount is the opposite of premium, characterized by the acquisition of an asset at a price below its true value. Simply put, discount can be defined as the discrepancy between a product's market value and the purchase price when the latter is lower than the market value.

Thus, in general, it is possible to say that the premium represents an additional charge, while the discount corresponds to a discount applied to the acquisition of a product, based on market conditions and the asset in question.

What are examples of premium and discount?

To make it clearer, see some examples of premiums and discounts in the financial market:

Example of Goodwill

• Stocks: When a stock trades at a price above its intrinsic value, it is said to be at a premium. For example, if a stock has a fair market value of R$ 100 but is trading at R$ 120, it has a premium of R$ 20.
• Real Estate: If a property sells for more than its appraised value or the average price of similar properties in the area, it constitutes a premium. For example, if an apartment is valued at R$500,000 but sells for R$600,000, there is a premium of R$100,000.

Example of Discount

• Debt securities: When a debt security is purchased for less than its face value, a discount is generated. For example, if a debt security with a face value of R$ 1,000 is purchased for R$ 900, a discount of R$ 100 occurs.
• Auctions: In goods or merchandise auctions, if an item sells for less than its market price, a discount is created. For example, if an item has an estimated value of R$ 1,000 but sells for R$ 800, there was a discount of R$ 200.

What are the contexts in which the discount appears?

Discounts occur in a variety of contexts. Here are some of the times you might encounter discounts:

• Debt securities: In the debt securities market, such as debentures and government bonds, discounted prices are common. This occurs when these securities are issued at a nominal value but are purchased in the secondary market for less than that value. The discount is a form of compensation for investors, as they are acquiring the security at a price lower than its nominal value.
• Auctions: In goods or merchandise auctions, discounts are common. Buyers' bids can result in a final price below the auctioned item's market value. This occurs when demand is lower or when buyers have the opportunity to purchase the product at a reduced price.
• Corporate Investments: In the context of corporate investments, especially startups, shares may be traded at a discount. This occurs when an investor acquires company shares at a price lower than the estimated value or the value of previous investments. The discount reflects a beneficial deal for the investor, considering market conditions and the company's characteristics.
• Promotional sales: During product promotions and sales, discounts are often offered to consumers. These discounts can be considered a discount, since the products are being purchased at a lower price than the original market price.
• Real Estate: In the real estate market, it is quite common to find discounts in real estate sales transactions, since, depending on several factors, the property may be sold at a value well below its nominal value, generating a discount in that transaction.

How to calculate the discount?

Calculating the discount is very simple. It requires some basic information. Here's the formula:

Nominal value – negotiated value of the product/service = discount value

With this simple formula, it is possible to know the exact discount values for a financial transaction or the sale of a product.

Frequently asked questions

[faq]