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. Investing

    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. Managing Wealth

    Private Equity's Returns Are Tempered By Its Risks (BX, KKR)

    Private equity firms adopt approaches to quickly hike up earnings and boost returns, but these investments come with big risks too.
  4. Investing

    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.
  5. Financial Advisor

    Should My Portfolio Include Private Equity?

    Private equity offers a lot of potential, but is it worth the risk?
  6. Investing

    The Power Of Dividend Growth

    Dividends may not seem exciting, but they can certainly be lucrative. Learn more here!
  7. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  8. Investing

    6 Winning Ways for Successful Dividend Investing

    There are some important rules to maximize dividend investing value.
  9. Investing

    Two Reasons Dividends Will Drive Returns in 2016

    Dividend paying stocks are expected to be in vogue this year. But investors have to be choosy when picking one to invest in.
Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  3. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center