Investing term

What is Risk premium?

The extra return investors demand for taking on risk, over and above what cash pays.

The risk premium is the extra return investors demand for taking on risk, above the return from safe cash or government bonds. It's the reward for enduring volatility and the chance of loss — and it's why stocks have historically out-earned cash over long horizons. No premium is guaranteed in any given year, but bearing risk is how investors earn more than the risk-free rate over time.

For example

If safe bonds yield 4% and investors expect 9% from stocks, that 5-point gap is the equity risk premium — payment for the bumpier ride.

Risk premium is taught hands-on in Stage 2 — Why Investing Matters (And When It Doesn't).

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Related terms

Asset classA broad category of investment with similar behavior. Stocks, bonds, cash, real estate, commodities.Behavior gapThe difference between a fund's reported return and what its investors actually earned — usually worse.Dollar-cost averagingInvesting a fixed amount on a fixed schedule, regardless of market level.FOMO buyingFear of missing out — piling into something after it has already run, because everyone else seems to be winning.
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