Short Report: Opportunity Cost in investing Explained

When I studied finance in college a very important principle I was taught was opportunity cost; which stated simply means if you use your money to buy something, you cannot use that money to buy something else, it has been spent.

This means for example, if you save money in an interest bearing savings account, your savings grows inside the account year after year. If you pull that savings out of the account to buy a car, it no longer grows in your savings account. Instead you used it to buy a car. There is an opportunity cost in buying the car. The opportunity cost is that your money is no longer earning interest and growing in the bank. The opportunity to earn interest was lost when you bought the car. That is called the opportunity cost of buying the car.

A simpler illustration of this principle is ordering food in a restaurant. If your parent takes you to a restaurant, where they serve both fish and steak, but you can only order one, either fish or steak, if you choose fish, you lost the opportunity to order steak. If you order steak, you lost the opportunity to order fish. Thus the opportunity cost of ordering steak is that you don’t get to order fish.

This principle or rule or law, which ever appeals to you, leads investors in search of the Holy Grail of investing, an investment with no opportunity cost, that allows you to save and buy at the same time, to order both steak and fish.
If you find it...“Bon Appetite.”

✍🏼 written by Shortsegments.

“The hustle never sleeps.”

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Picture Credit: Fish and Cow Picture: http://www.laughspark.com/funny-image-with-cow-and-fish-14382

Title: Short Report: Opportunity Cost in investing Explained. By Shortsegments.