Cost of Equity



Next video:
Loading the player...

The cost of equity is the rate of return an investor requires from a stock before exploring other opportunities.

Companies have to reward shareholders for the risk that other investments will pay a higher return.  Typically, the cost of equity is higher when the overall stock market is strong, or when the company is seen as volatile.

The rate of return that investors seek may come from two possible sources. In some cases, they receive dividends, which provide an immediate reward for their ownership. Or the stock could experience appreciation, enabling them to profit when they sell shares.

 

Cost of Equity = [Dividend Payout ÷ Share Price] + Rate of Appreciation

 

Related Articles
  1. Investing

    Calculating the Equity Risk Premium

    Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the risk-free rate.
  2. Managing Wealth

    How to Calculate Required Rate of Return

    Investors use the required rate of return to decide where to put their money, and corporations use it to decide if they should pursue a new project.
  3. Markets

    Top Income Investing Strategies for 2016

    Dividend paying stocks and equity income funds are two ways to get yield out of your investments this year.
  4. Investing

    The Equity-Risk Premium: More Risk For Higher Returns

    Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.
  5. Retirement

    High Yield Stocks Can Hurt Your Retirement Nest Egg

    High yield stocks can give you a handsome return, but for retirement investors the risk far outweighs the reward.
  6. Managing Wealth

    5 Reasons Why Dividends Matter to Investors

    Learn five of the primary reasons why dividends are of significant importance for the overall performance of stock market investments.
  7. Managing Wealth

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  8. Trading

    How to Calculate Required Rate of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  9. Managing Wealth

    The Importance of Dividends in Your Portfolio

    Learn some of the primary reasons why dividends constitute a critical factor in the overall performance of a stock investor's portfolio.
  10. ETFs & Mutual Funds

    Stocks

    What stocks are: Securities that represent a portion of ownership in the corporation that issued the stock. Also called equities. Pros: Capital appreciation; many outperform other investments; ...
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center