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Equity risk premium |
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Equity risk premiumThe concept that justifies investment in stocks, where your capital is at risk, rather than gilt-edged bonds which are as safe an investment as you can get and where your capital is not at risk provided you hold the bond til maturity.The theory goes that it is only worth investing in stocks if the return you get exceeds the return you could get on gilts - otherwise, why would you take on the extra risk? The difference in returns is known as the equity risk premium.Every historical analysis of returns achieved by stocks compared to bonds shows that stocks outperform bonds in the long term. This is why you repeatedly hear pundits say that the stock market, while risky in the short term, is not risky in the long term. The key thing, as a private investor, is to leave your money in the market for long enough for the long term benefit to eradicate the short term risk. Stick your money in the market for two months, and it might go down 20% if you are unlucky. Stick it in a well-diversified portfolio for 30 years, and it should produce returns that comfortably exceed what you could have got from bonds.Similar MatchesPremium bondsPremium bondsSee: 'National Savings'. Warrant premiumWarrant premiumThe extra amount you pay for a warrant over and above its intrinsic value. The premium on a warrant is calculated as: (the price of the warrant) - (difference between the exercise price and the price of the underlying asset). So if a warrant costing 8p gives you the right to buy a share at 75p, and that share is currently trading at 70p, the premium is 3p (8-5). PremiumPremiumThe extra amount you pay for a security over and above its intrinsic value. For example: Warrants: the premium on a warrant is calculated as the price of the warrant minus the difference between the exercise price and the price of the underlying asset. So if a warrant costing 8p gives you the right to buy a share at 75p, and that share was currently trading at 70p, the premium would be 3p (8-5). Investment trusts: the premium is the amount by which the share price of the investment trust exceeds its net asset value per share. e.g. If the Net Asset Value is £3.00, and the share price of the trust is £3.30, the trust is trading at a 10% premium to its NAV. In the more common situation where the share price is below the net asset value, the trust is said to be trading at a discount. Bond premiumBond premiumSee: Bond discount Waiver of premiumWaiver of premiumA provision in an insurance policy that allows payment of insurance premiums to be permanently or temporarily stopped in the event the policyholder becomes incapacitated. Further Suggestionslife assurance premium reliefPremium Fixed premium Insurance premium Forward premium Premium income Option premium Percentage premium Indemnity Guarantee Premium single premium life insurance Conversion premium Liquidity premium Term premiums insurance premium tax Call premium Tender offer premium Risk premium option premium insurance premium High premium convertible debenture Premium bond Single premium life insurance Unamortized premiums on investments Risk premium approach Forward premium |
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