What is a discount? Definition and examples
The noun ‘discount’ means a deduction from the usual price of something. The verb ‘to discount’ means to deduct an amount, usually from the price of something.
The term can also mean to decide that somebody or something is not worth giving attention or considering. For example, if I say “We discounted fears of a computer system breakdown on new year’s day,” it means that I have eliminated that possibility.
In the world of stocks and shares, if I say that “Stocks were being discounted,” it means that stocks went down in value. They didn’t go down in value because the owner wanted to attract customers. They went down in value because of market forces, i.e., the forces of supply and demand.
Trade discounts occur when wholesalers or manufacturers reduce the price of the goods they are selling to retailers.
BusinessDictionary.com has two meanings of the term:
“1. Deduction from the face amount of an invoice, made in advance of its payment. 2. Deduction from the par value of a financial instrument, made in advance of its sale. Opposite of premium.”
Example of a discount
Jenny wants to commute by bicycle. In other words, she wants to cycle to and from work each day.
So, she goes to the bicycle shop. A salesperson comes up to her and asks whether she needs any help. Jenny explains why she wants to buy a bicycle.
The salesperson presents four different bicycles. Jenny prefers the ACME Girl. It looks attractive, sturdy, and had a good write up in last week’s Cyclist Today magazine.
The price tag is $250. This is a bit more than Jenny had budgeted for. She looks at the salesperson and asks her whether the price is negotiable.
“There is a 10% discount if you pay with cash rather than a credit or debit card,” the salesperson informs.
This means that if Jenny pays in cash, the bicycle will cost her $225. This is just within her budget. She accepts the new price with the discount, pays the salesperson, and rides her new bicycle back home.
In this context, to budget means the amount of money you set aside for something.
Discount loan
This is a loan in which the lender discounts interest and other charges first from the face value, before lending the money to the borrower.
The lender only does this for short-term loans.
Discount rate
The term discount rate can have several different meanings:
– The interest rate that a country’s central bank charges domestic commercial banks for very short-term loans.
– The discount on a draft or bill of exchange if somebody cashes it in before its maturity date.
– The interest rate used in a discounted cash flow analysis.
– The reduction in an invoice’s value if the customer or client pays before a specific date. This meaning also applies if the purchaser buys more than a certain amount.