Cost of equity

Cost of equity is the return shareholders require for holding a company's stock instead of a safer alternative. Unlike a loan, equity carries no fixed repayment schedule or guaranteed interest rate, so this return has to be estimated rather than read directly off a contract.

A common way to estimate it starts with a safe baseline return, adds a premium for holding stocks generally instead of that safe alternative, and scales that premium by how much the specific stock tends to move relative to the market as a whole. Cost of equity is one of the two inputs, alongside cost of debt, that get blended into a company's overall cost of capital.