What Is Opportunity Cost?
Opportunity cost is what you give up when you choose one option over another. Every choice has a cost, even when no money changes hands.
Everyday examples
If you spend Saturday working an extra shift, the cost is the free day you gave up. If you spend $1,000 on a new phone, the cost is whatever else that $1,000 could have done.
In investing
Leaving $10,000 in a checking account paying nothing has a cost: what it might have earned elsewhere. Holding a stock that goes nowhere for years costs you the growth you could have had in an index fund.
In business
Companies face it too. Cash spent on a buyback cannot be spent on a new factory. Good managers pick the use with the best return. That is why investors watch return on invested capital.
Related terms
Compound interestGrowth that earns more growth.
ROICHow well a company turns invested money into profit.
Asset allocationHow you split money between stocks, bonds and cash.
InflationWhen prices rise and money buys less.
Stock buybackWhen a company buys its own shares.
Interest ratesThe price of borrowing money.