The stock market is not all about quick, fancy trades and high returns. Although investing in the stock market can be exciting and can net you very high profits, successful investors put a good amount of time into analyzing every stock pick before laying out any cash. Sit down with a pen and paper, or a good software program, and plug in lots of numbers in order to see if a stock has true earnings potential. In many cases you'll find information from professionals, but even a novice should have these tools.
Get your numbers. You're calculating growth based on other figures to which you already have access. If you are calculating past growth, you need figures from the start date through the present. If you are calculating a future growth rate, you'll need present numbers and forecasted numbers. We'll do an example using this case: Suppose the price of stock x is currently $25. Next year, analysts predict the price to be $35, and the year after to be $55. (Plug in whatever numbers you have instead of these.)
Subtract the future value from the present value. Here it looks like this: $55 minus $25 equals $30. The future value figure will be the present value when seeking past growth.
Divide the result by the present value. Here you have $30 divided by $25 equals 1.2. Turn this into a percentage and you get 120 percent. (A one before the decimal point always means one hundred.)
Convert the percentage to a yearly growth number. The percentage you currently have would only work in a one-year case, but you have to figure out the yearly growth for two years. So raise it to the power one divided by the number of years you're looking at. Here it looks like this: 1.2 plus one (when multiplying by a percentage you need to add back one to account for the original amount) equals 2.2 raised to 1 divided by 2 is actually the square root of 2.2. If you have three years it would be the cube root, and so forth. Here the answer is 1.48, or 148 percent.
Subtract one from this number to get the annual growth rate, 48 percent. This is the average, annualized growth projected for this stock.
Items you will need
- Calculator or software program
- If it gets too confusing, consult daily papers, which generally quote the numbers.
- Chris Stein/Lifesize/Getty Images
- How do I Calculate Investment Performance?
- How to Calculate Linear Regression Lines and Slopes for Stock Prices
- How to Calculate Percentage Increase of a Stock Value
- How to Read Stock Charts Like a Pro
- Characteristics of an Efficient Portfolio
- What Is a Stock's Realized Annual Return?
- Differences Between an Expected Rate of Return & a Required Rate of Return
- Buying One Stock vs. Diversifying Your Portfolio