At a Premium: Meaning and Overview

Key takeaways

  • "At a premium" describes an asset priced above a chosen reference value (intrinsic value, market value, NAV, etc.).
  • The phrase can be factual (e.g., an acquisition paid above market price) or subjective (an analyst's view of overvaluation).
  • Common forms include acquisition premiums, premiums to NAV for funds, and risk premiums (including the equity risk premium).
  • Always check the basis of comparison and underlying fundamentals before concluding a security is overpriced.

What "at a premium" means

Being "at a premium" means the current transaction or market price of an asset exceeds some benchmark or estimated intrinsic value. The benchmark depends on context: market price, net asset value (NAV), estimated fair value, or a competing security's valuation metric.

Simple premium percentage formula:
(Market price − Reference value) / Reference value × 100

Example: NAV = $10, market price = $11 → premium = (11−10)/10 = 10%.

Common types of premiums

  • Acquisition premium
  • When an acquirer pays more than the target's prevailing market price.

  • The excess often appears as goodwill on the acquirer's balance sheet.

  • Premium to NAV (closed-end funds)

  • Some funds trade above (premium) or below (discount) their NAV per share.

  • Expressed as a percentage of NAV.

  • Risk premium and equity risk premium

  • Risk premium: expected return above the risk-free rate to compensate for extra risk.

  • Equity risk premium: extra return investors expect from equities versus risk-free assets. The size varies with perceived market risk.

  • Insurance and options premiums

  • In insurance or options markets, "premium" refers to the price paid for protection or the right to a contract.

Using "at a premium" in stock comparisons

Analysts often say one stock trades "at a premium" to another. That comparison can be misleading unless you standardize the basis:

  • Use comparable metrics (P/E, EV/EBITDA, price-to-sales) rather than raw share price.
  • Account for differences in growth, profitability, capital structure, and shares outstanding.
  • A higher multiple can be justified by stronger growth prospects, superior margins, or lower risk.
  • Market prices reflect collective expectations; intrinsic value estimates are inherently subjective.

Example: Stock A P/E = 25, Stock B P/E = 15 → Stock A trades at a premium on P/E (about 67% higher), but whether it's overvalued depends on future earnings growth and risk.

Practical guidance for investors

  • Clarify the reference value used in the comparison (market price, NAV, intrinsic value, or a financial ratio).
  • Compare like with like: use the same valuation metric and adjust for one-time items.
  • Investigate why a premium exists: growth, competitive advantage, management quality, or market speculation.
  • Remember markets set prices; differing views on intrinsic value are common. Use multiple valuation approaches and sensitivity analysis to form a reasoned conclusion.

Conclusion

"At a premium" is a flexible phrase that can describe a verifiable price gap (as in acquisitions or NAV comparisons) or express a subjective judgment about valuation. Interpretation requires knowing the reference point, the reasons for the premium, and whether the premium is justified by fundamentals or driven by market sentiment.