What does opportunity cost mean?

[april]

What does opportunity cost mean?

[hughesfleming]

The whole basis for the study of economics is that resources are scarce and have to be allocated. We can't do everything in life so we have to make choices and it is the same for trading. Lets say that you decide to allocate 100% of your capital to forex trading but you also feel that investing in property is also a valid alternative.... but you can't do both. You made this decision because you feel that trading forex will provide a better return on this capital. Since nothing is certain, your opportunity cost is a valuation of what you did not do.

If the property market booms and you lose half your capital trading forex, then your opportunity cost of not having invested in property is very high. If you break even in trading and the property market is flat then the opportunity costs are essentially the same.

[trader6]

That sounds like an excellent way of explaining opportunity cost. Thanks Hughes.

[hughesfleming]

Thanks paidinfull, your welcome.

[cynthia]

Opportunity cost can also be like into in forex as measuring the value of trade you are currently engage in against the next best alternative. Sometimes a trader may hold on to a losing trade even when he see an opportunity to for a more profitable trade. Holding on to a losing trade is the opportunity cost.

[whisperer]

natswill:
Opportunity cost can also be like into in forex as measuring the value of trade you are currently engage in against the next best alternative. Sometimes a trader may hold on to a losing trade even when he see an opportunity to for a more profitable trade. Holding on to a losing trade is the opportunity cost.

Nice explanation. Thanks

[mavel]

Opportunity cost means the benefit you could have received by taking a definite action. whatever we choose opportunity cost is the value of the choice we could have had.

[whisperer]

The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).