2023-06-29 03:25:02
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Anyone who wants to succeed when investing in the financial market needs to know the meaning of certain technical terms. For example, do you know what discount is or how it is calculated? Having this knowledge can help when choosing an investment.
Furthermore, the discount can be present both in the alternatives of fixed-income and variable-income securities. Therefore, understanding its meaning and how it works is essential for anyone who intends to invest or already has investments.
To learn more, check out this content and learn what discount is, the main differences in relation to goodwill and how to calculate it.
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What is and how does the discount work?
In finance, discount represents the negative difference between the price of an investment and its face value. In this scenario, it is important to highlight that price and value are not synonymous in the financial market.
The price refers to the financial amount needed to acquire a product or financial asset in the market. The value represents the set of benefits that that investment can bring to the investor.
Therefore, the discount is a kind of discount on the price of the security or asset. This is because the investment will be priced lower than it is effectively worth. Therefore, investing in discounted alternatives can be an interesting investment strategy.
After all, the chances of the market correcting these asymmetries between price and value are greater. In this sense, you can buy it cheap to later sell it more expensive – profiting the difference.
Now, in the event of undoing an investment at a discount, there will be financial losses. The reason is that in this case you will receive a smaller amount than you paid when you purchased it.
What is the difference between premium and discount?
After knowing the concept of discount, it is worth understanding what goodwill is and the difference between the concepts. In practice, goodwill is the opposite of negative goodwill. That is, it represents an increase in the price of the product or asset in relation to its nominal value. This means that, with the premium, it will be priced higher than it is effectively worth.
To better understand this concept, imagine that, today, you bought shares quoted at R$ 10.00 each. After a week, suppose it is quoted at R$13.00 and you decide to sell it in order to realize the profit. In this example, the premium was R$3.00 per share.
Finally, both goodwill and discount are not limited to investments. Goodwill can be seen in real estate financing, for example. In this type of contract, you will pay the financial institution an amount higher than the sale of the property, since it is plus charges and interest.
The discount, in turn, can be observed in the purchase and sale of vehicles. When trying to sell a semi-new vehicle, it will hardly be possible to get a higher price than what you paid when it was new. Normally, it is necessary to apply a discount to close a deal.
Why is it important to understand this concept?
By understanding the concepts, it becomes easier to see that the operation of discount and goodwill is important to guide the investor. If he is faced with two different investment alternatives, he can use the discount to choose the most valuable one at the lowest price, for example.
However, you need to be aware of the risks. In certain periods, the discount may be related to an occurrence that must be considered in the decision. In the case of stocks, for example, it may represent an event or news that has negatively impacted the company.
Furthermore, knowing this concept can be very useful for managing your investment portfolio. For example, you can monitor which of your investments are at a very high discount to, if necessary, increase your position.
Still in this example, this may be an opportunity to check whether the reasons that made you invest in an asset are still present. If they are not, it may be time to reallocate the invested amount to another alternative – if that makes sense to you.
It is also necessary to bear in mind that disposing of an investment at a discount will represent financial losses. Therefore, it is essential to have good financial planning and know how to control the risks of your portfolio, in order to make the best decisions.
How to calculate the discount on investments?
Now that you’ve seen the importance of understanding discount, it’s time to learn how to calculate it. In general, the discount can be calculated in two ways. See below!
Fixed Income
When talking regarding fixed income investments, such as Right Treasurebank deposit certificates (CDBs), real estate letters of credit (LCI), among others, discount has the following formula:
TF = P ÷ (1 + rate) x (fee term/period)
Understand what each calculation item means:
FV — current quote of the investment P — face value; Rate — represents the agreed interest rate (annual, monthly or daily); Rate period — number of days the rate is expressed.
After performing the calculation, if the result is positive, you will have found the discount. On the other hand, if the result is negative, you will observe the goodwill of the product.
Variable income
In variable income investments, such as stocks, the formula is a little simpler, check out:
Discount = P / VPA
Where:
P — is the price per share (current quotation); VPA — represents the book value per share.
A result of less than 1 means that the stock’s market price is discounted (with a discount). If the result is equal to 1, it means that the market price is equivalent to the nominal value of the share. Finally, if the result exceeds 1, the share will be overvalued (with premium).
The VPA of a stock can be found on the balance sheet of the company being analyzed. Through this type of analysis, you can identify whether the stock is expensive (with a price greater than its value) or cheap (with a price lower than its value).
However, in variable income it can also be interesting to observe other factors to understand the cause of the discount and make better decisions for your portfolio.
Once you’ve seen what discounting is, you can include this factor in your analysis to make the best investment choices. In any case, if you still have doubts regarding the subject, it is worth seeking the help of an investment advisor.
Do you want to invest with more peace of mind? contact now Renova Invest and count on qualified support to make your contributions in the financial market!
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