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Trends & Analysis
News

Week Ahead Preview: 17th of February

News

Europe stocks hit record high on strong earnings

News

BRIC currencies mostly gain as US inflation rises

News

Refresh your portfolio with Coca-Cola?

News

GBP/USD price may rally to multi-week high

News

EIA ups oil output forecast, but supply fears loom

Trends & Analysis
News

Week Ahead Preview: 17th of February

News

Europe stocks hit record high on strong earnings

News

BRIC currencies mostly gain as US inflation rises

News

Refresh your portfolio with Coca-Cola?

News

GBP/USD price may rally to multi-week high

News

EIA ups oil output forecast, but supply fears loom

Discount rate definition

The discount rate is the interest rate that central banks charge financial institutions to borrow funds. In trading and investing, it is used to measure the cost of capital and the opportunity cost of investing in a particular asset.

Traders and investors can use the discount rate in financial modelling to value assets such as stocks, bonds, and real estate. For example, the discount rate can be used to determine the present value of future cash flows, such as dividends or bond coupon payments.

Using the discount rate in stock trading

If an investor is considering purchasing a stock that is expected to pay out $20 per share in dividends in the following year, they can use the discount rate to determine the current value of that future cash flow with this formula:

PV = D / (1+r)^n

where PV represents the Present Value, D represents the future cash flow or dividend expected from the investment, r represents the discount rate, and n represents the number of periods in which the future cash flow will be received.

Let’s say the trader has considered the risk and return profile of the stock, and they deem that a discount rate of 10% is appropriate. They would calculate the present value of the future $20 dividend payment for the stock as $18.18.

If the stock is, at present, trading at less than $18.18 per share, it may be undervalued, and the trader may find a potential buying opportunity. Conversely, if the stock is trading at more than

$18.18 per share, it may be overvalued, and the trader may find a potential selling opportunity.

Start trading with ADSS

ADSS offers a range of global markets for traders, with opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.

 

See all glossary trading terms


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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.

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