We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is the Cost of Capital?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 6,742
Share

Cost of capital is essentially another way to identify the opportunity cost that is associated with a given investment. In other words, the cost of capital has to do with the amount or rate of return that can be expected on the investment, in comparison to what would be realized by selling off the investment. Investors routinely consider the cost of capital when projecting the potential profits that may be made by choosing to invest in a given stock or bond issue.

When an investor chooses to make an investment, there is usually an expectation that two specific events will take place. First, the investor will recoup the amount of capital initially used to purchase the bonds or stocks involved in the transaction. Thus, there is anticipation that the investor will not in fact incur a loss as a result of the acquisition. Generally speaking, investors do not invest in securities that offer little to no hope of recouping the initial investment, as this represents negative opportunity costs and defeats the purpose for investing.

Along with recouping the initial investment, the typical investor also hopes to earn a return on the securities that are acquired. Depending on the strategy of the investor, this may include a short period where the investment actually loses money before the security stabilizes and begins to rise in value. But the ultimate goal is for the investment to generate a positive cost of capital. That is, the investor seeks to realize a rate of return that not only exceeds the initial cost of acquisition, but also earns the investor a significant amount of financial rewards that help to compensate for the time and effort put into the investment strategy.

Because the whole point of investing is to make money rather than lose it, investors and brokers will pay close attention to the history and future potential of a given investment opportunity. By doing so, the chances of realizing a rate of return and thus generating a positive cost of capital are much better than in cases where no research into the potential of the security takes place.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-the-cost-of-capital.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.