Final answer:
Shares selling for a discount are trading below their net asset value (NAV), often due to negative market sentiment, while shares at a premium are above NAV, usually due to positive expectations. Both situations reflect investors' predictions of a company's future earnings and overall market conditions. These dynamics are also applicable to bonds, where interest rate fluctuations after issuance affect whether they trade at a discount or premium.
Step-by-step explanation:
The difference between shares selling for a discount and shares selling for a premium from their net asset values (NAVs) is related to the difference between the market price of the shares and their NAV. When shares sell for less than their NAV, they are considered to be at a discount. This situation may arise when the market is pessimistic about the company's future prospects or when there are more sellers than buyers for the shares. Conversely, shares sell for a premium when their market price is higher than the NAV, which may occur when investors are optimistic about future growth and profits and there is high demand for the shares.
Investors consider both potential capital gains and dividends when determining their willingness to pay for a share. The market's collective outlook, including differing opinions on a company's future earnings and the general economic conditions, influences whether shares trade at a discount or a premium. When expectations are positive, and investors believe the future benefits are greater than the current price, they're likely to pay a premium. On the other hand, when future benefits are not expected to justify the NAV, shares may trade at a discount.
Similar principles apply to bonds. If interest rates decline after a bond is issued and the bond's rate is higher than the current market rate, it tends to sell at a premium. In contrast, if interest rates increase, causing the bond's rate to be lower than the market rate, it will likely sell at a discount. It all comes down to the present discounted value of future expected benefits.