At a Discount - Explained
What is At a Discount?
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What is At a Discount?
At a discount is a term that refers to a situation in which a stock is traded at a price below its regular price or par value. When a security is sold below the current market value or sold below its nominal price, the security is trading at a discount. The face value or par value of a security is its nominal price, it is the minimum price of a security as contained in the company's charter. This means, in an initial public offering, a security is not expected to be sold below its par value. When a security is being sold at a price below its par value, it is trading at a discount.
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How Does At a Discount Work?
The market price of securities do not affect their nominal price. A security's nominal price or par value is the least price the management of a company has agreed to sell it at an IPO, this price is detailed in the charter of the company. However, in many cases, stocks of companies are not issued at their face value, while some companies issue stocks at a premium, other companies issue the stocks at a discount. When a company sells its stock below the nominal value or sometimes below the market value, it is trading at a discount.
There are certain effects that selling at a discount has on a company and in extension to the creditors of the company. For instance, selling at a discount reduce the capital strength of a company and this in turn leaves the company in debts and defaults. Investors or shareholders who but stock that are sold at a discount are also exposed to the risk of contingent liability. There are certain measures put in place to restrict selling at a discount. This offers protection to the creditors of the company. Despite the laws and regulations against trading at a discount, there are some exceptions to selling at a discount such as employees of a company who purchase the shares of the company at a discount.