Definition
An asset trades at a premium when its price is above a chosen reference value, and at a discount when its price is below that reference.
The reference changes with the market. It can be a fund's net asset value, a bond's face value, the spot price of a commodity or currency, or the price of the same share on another exchange. Without a stated reference, "premium" and "discount" have no fixed meaning.
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Formal definition
Premium or discount is the difference between the market price and the reference, usually shown as a share of the reference:
| Item | Formula |
|---|---|
| Absolute premium or discount | Market price − Reference value |
| Relative premium or discount | (Market price − Reference value) ÷ Reference value, shown as a percentage |
A positive result is a premium. A negative result is a discount. Some reports show a discount as a negative percentage. Others show it as a positive figure labelled "discount", so check the sign convention before you compare sources.
Worked example (hypothetical)
Take a closed-end fund, a fund with a fixed number of units that trade on an exchange.
- The fund's net asset value per unit, meaning its holdings minus its liabilities divided by the units outstanding, is N.
- The units trade on the exchange at a price P, and P is lower than N.
The fund is trading at a discount. The discount is (P − N) ÷ N, which is negative. If buyers later push P above N, the same fund is trading at a premium. The holdings have not changed. Only the price the market pays for them has changed. For funds of this type, see open-end vs closed-end fund.
Where the term appears
- Bonds. A bond priced above its face value trades at a premium. This often happens when its coupon is higher than current market yields. Below face value, it trades at a discount.
- Funds and ETPs. Fund factsheets and exchange data show the premium or discount of the market price to net asset value. See exchange-traded product.
- Futures. A future priced above spot is at a premium, which is linked to contango. Priced below spot, it is at a discount, which is linked to backwardation.
- Forex forwards. A currency is at a forward premium or discount when the forward rate is above or below spot. The gap is quoted in forward points and follows from covered interest parity.
- Depositary receipts. An ADR or GDR can trade at a premium or discount to the underlying local share after currency conversion.
- News. You will see phrases such as "the stock trades at a discount to book value" (see book value) or "gold trades at a premium in the local market".
Edge cases
- Option premium is a different meaning. It is the price paid for an option, not a gap to a reference. See call option.
- Chart "zones". Some technical-analysis methods call the upper half of a price range "premium" and the lower half "discount". This is a labelling convention, not a valuation.
- Stale references. Net asset value or spot can be calculated at a different time from the market price. Part of the gap may come from the timing, not real mispricing.
- Costs and carry. A premium or discount can persist because of fees, interest differences, liquidity or restrictions on moving capital. A gap does not by itself mean the price will converge.
Prices of leveraged products such as futures and CFDs can move against you quickly. A premium or discount does not reduce that risk, and leveraged trading can lose money fast.
Related terms
Basis point · Futures roll · Front month · Credit spread · Exchange-traded note · Arbitrage · Trading glossary
Frequent questions
What is the premium meaning in trading?
It means the price is above a reference value, such as net asset value, face value or spot. The meaning depends on which reference is used.
Is trading at a discount the same as being cheap?
No. A discount only shows that the price is below the reference. The reasons can include costs, risk, liquidity or a stale reference value.
How is a premium or discount expressed?
It is usually shown as the gap divided by the reference value, as a percentage. Forex forwards are an exception and use forward points.
Is an option premium the same thing?
No. An option premium is the price of the option contract itself.