Final answer:
The profit for trading securities is based on the potential for future capital gains and expected dividends, influenced by interest rates and market conditions. Present discounted value calculations help determine the worth of these future benefits, affecting the price investors are willing to pay today.
Step-by-step explanation:
The profit of the period for trading securities is determined by the current presence of potential capital gains from selling the securities in the future and the dividends that might be paid out during the holding period. The market's valuation of these securities is influenced by various factors, including expected returns, the prevailing interest rate, and overall market conditions. Conceptually, investors are willing to pay a price in the present for a stream of benefits they anticipate in the future. This valuation process can also be applied to bonds, where the present value allows investors to determine the worth of future interest payments and the repayment of the principal in today's terms.
Understanding how present discounted value applies to bonds and stocks is critical for investors looking to optimize their returns. If interest rates fall after a bond is issued, the bond can sell for more than its face value. Conversely, if the interest rates rise, the bond will sell for less. Stocks are affected by interest rates, but also by dividends and potential capital gains. In any financial market, those who demand financial capital expect to pay a return while those who supply financial capital through savings expect to receive a return. This interaction between supply and demand ultimately determines the market price and the associated rate of return on the investment.