Opportunity cost

What is opportunity cost

Opportunity cost is the value of the next best alternative you give up when you choose an option.

Money, time and attention can each go to only one use at a time. Whatever you pick, the forgone choice is the price you pay, even if no fee is charged.

Formal definition

In economics, opportunity cost is the return of the best available alternative that was not chosen, measured over the same period.

• Explicit costs are actual payments, such as spreads, commissions or swap fees.
• Implicit costs are forgone returns, such as interest you could have earned on idle cash.
• Economic result = accounting result − opportunity cost.

A trade can show a profit on the account statement and still be worse than the alternative once opportunity cost is counted.

Worked example

This is a hypothetical case written in letters. You can use your own figures with the calculators.

• A is the amount held as margin or free balance in a trading account.
• r is the annual rate on a deposit or savings product you could have used instead.
• t is the holding period as a fraction of a year.

Then:

• Forgone interest ≈ A × r × t
• G is the gross trading result.
• C is the explicit costs (spread, commission, swap).
• Economic result = G − C − (A × r × t)

If G − C is positive but smaller than A × r × t, the trading was profitable in accounting terms but lost money against the alternative.

Leveraged CFD and forex trading can also lose money fast, so G can be negative. The deposit alternative has its own risks, but they are of a different kind.

Where you see the term

• Central bank news. Commentary on rate decisions often says higher rates raise the opportunity cost of holding assets that pay no interest, such as gold. An example of such a decision: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC).
• Fund and portfolio reports. Returns are compared with a benchmark or a risk-free rate. That comparison is opportunity cost in practice. See annualized return and alpha.
• Trading platforms. MetaTrader shows balance, margin, swap and profit. It never shows opportunity cost as a line item, so you have to work it out yourself.

Edge cases

• Sunk costs are not opportunity costs. Money already spent and not recoverable is not a forgone alternative. It should not drive the next decision.
• The alternative must be real. Use the rate actually available to you after tax, with the same access to your money. A headline rate you cannot get is not a fair comparison.
• Risk must be comparable. Comparing a risky trade with a near risk-free deposit mixes return with risk. A fair comparison adjusts for risk.
• Before and after. Opportunity cost is estimated before a decision. Looking back afterwards, it is easy to pick the alternative that happened to do best.
• Time and attention count. Hours spent watching charts are also a cost.

Related terms

Basis point · CAGR · Accrued interest · Covered interest parity · Collateral · Exposure · Risk management · Saving, investing, loans · Trading glossary

Frequently asked questions

What is the opportunity cost meaning in simple words?

It is what you give up by choosing one option instead of the best other option.

Is opportunity cost a real cost?

It is not a payment, so it does not appear on statements. It does change whether a decision was worth it.

What are common opportunity cost examples in trading?

Common examples are interest forgone on margin or idle balance, capital locked in one position that could have gone elsewhere, and time spent on trading.

Does a higher interest rate raise opportunity cost?

Yes. A higher rate on available deposits raises the forgone return of holding cash in non-interest uses.

Is opportunity cost the same as a loss?

No. A loss is a negative result. Opportunity cost is the gap between your result and the best alternative's result, and that gap can exist even when your result is a profit.