- The word “premium” has many uses in finance, but it’s mostly used to mean excess financial value, a price, or a payment.
- In stock trading, premium often refers to the cost of buying an option.
Premium is a broad word in the English language, but when it comes to financing, premiums are generally used to refer to payment for something that has a perceived value.
Specifically, the word “premium” can refer to:
The total cost to buy an option – This could include products, shares, stocks, property, and more. It usually gives the rights to the holder or the owner of the commodity to withhold how to buy or sell a financial instrument in question. Before this transaction is done and for it to be paid, there will have to be a strike price for the commercial device as if it went through bidding or negotiations.
Excess amount paid – The second definition for “premium” is perhaps the most well-known use of the word in the financial world. It is the excess or higher amount paid for a security that has a fixed income. It usually means that in funding for this sort of premium, you understand that what you’re paying for is more than the security’s face value. You might say that you “paid a premium” to receive it.
A regular amount paid for insurance – The third use of the word premium is often used in the insurance industry, referring to an “insurance premium”. This is usually the amount which you have to pay periodically to the insurance company for covering a risk. This is probably familiar to you already if you have dealt with various insurance companies in the past.
Regardless of which use, it is almost always some payment plan or value when used in an economic or financial context. As such, it can be considered a jargon term when it comes to business talk or buyer and seller interaction, and should not be confused with the conventional dictionary definition of the word.
Premium in stocks
When it comes to investing in the stock market, it typically has a similar connotation attached to it. Sometimes it is an excess dollar value on the particular common stock, so corporations receive a bonus when they exchange shares for a price with surplus value.
It is a somewhat confusing term when investing in stocks since it will be used quite often during financial deals, transactions, or even explanations. But when in doubt, always equate the term “premium” to excess value in an economic context. Just having a general sense of what the word means and is used for in business is also quite advantageous when talking to companies and business-minded individuals, as well as dealing with investments.