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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 MatchesHigh premium convertible debentureHigh premium convertible debentureA bond with a long-term, high-premium, common stock conversion feature. It also offers a competitive interest rate. This type of investment vehicle is aimed at bond investors who want to be able to convert into stock to hedge against inflation. Percentage premiumPercentage premiumApplies mainly to convertible securities. Premium over parity of a convertible bond divided by parity. PremiumPremiumIn the context of insurance, a premium is the regular sum you pay to keep your cover in force. Insurance premiumInsurance premiumPayments calculated by the insurance company based on risk factors that must be made by the insured to guarantee protection of property loss under an insurance policy. Premium bondPremium bondA bond that is selling for more than its par value. Further SuggestionsCall premiumTerm premiums Risk premium approach Liquidity premium Fixed premium Premium income option premium warrant premium insurance premium Conversion premium Single premium life insurance Bond premium single premium life insurance waiver of premium premium bonds Default premium premium Unamortized premiums on investments Indemnity Guarantee Premium Tender offer premium Option premium Waiver of premium Single Premium Deferred Annuity (SPDA) life assurance premium relief Forward premium |
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