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Finance Dictionary and Glossary of Investment Terms
The difference in return between a chosen investment and one that is passed up.
The cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement.
The cost of passing up one investment in favor of another. For example, if you take your money out of a money market fund that is paying 6 percent to invest in a promising stock that yields only 4 percent, the opportunity cost while you''re waiting for the stock to go up in value is 2 percent.