Term: DISCOUNTING

The price of a share is the average of all investors’ discounted cash flows of the future dividends of the company. If the profits and hence the dividends of a company are expected to fall then investors will tend to adjust the price which they are prepared to pay for the share downwards – and vice versa. This process is known as discounting. All events which impact the profitability of a company are “discounted” into its share price sooner or later.

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