What is a Premium/Discount?


Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “Premium/Discount”
A premium or discount represents the percentage difference between the previous closing market
price of an exchange-traded fund, exchange-traded note or closed-end fund and that security’s
net asset value called an NAV. The security trades at a premium when the NAV of the security
is below its previous close and is represented by a positive number. The security trades
at a discount when the NAV of the security is above its previous close and is represented
by a negative number. In short, if the price of the electronically
traded fund also called an ETF is trading above its NAV, the ETF is said to be trading
at a “premium.” Conversely, if the price of the ETF is trading below its NAV, the ETF
is said to be trading at a “discount.” In relatively calm markets, ETF prices and
NAV generally stay close. However, when financial markets become more volatile, ETFs quickly
reflect changes in market sentiment, while NAV may take longer to adjust—resulting
in premiums and discounts. This can happen throughout the trading day,
because the ETF and its underlying securities are actually two distinct liquidity pools
that are only loosely linked. If optimistic investors start bidding up an
ETF aggressively—more so than its underlying securities—the price of the ETF may rise
faster than the price of its underlying securities and, consequently, may trade at a premium.

1 comment

You know what a good explanation is.
"A bond sold at a premium is a bond sold at a price higher than the original" or if its the other way around then "a bond sold at a premium is selling it below the original price" but no you have to throw all the words about finance that you know that clearly a rookie doesn't understand.

Its obvious that if I have to ask what a premium or what a discount is then I don't have the knowledge or the language to decipher all these technical words that you're throwing, at the same time that I try to capture the idea of the response.

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