Please help. I am stuck. I am still pretty new to investing, so please be nice and a simple explanation is much appreciated. I want to calculate the capital gains (NO DIVIDEND) annual return of a stock. Which calculator should I use to do it: the CAGR or Compound Interest calculator? I am confused...for the latter, one need to give the Compound interval (yearly, monthly or quaterly) and how would I know that for stocks that do not pay dividends, whose only return are based on capital gains? For example, let's say that I had invested 100 eur in one stock that had a total return of 150% after 5 years in capital gains, totalling 250 eur. How do I find out the annual rate of return on that stock for those 5 years? using a CAGR calculator or compound interest calculator? thanks to those who replies.
2 Answers
I'm not seeing a difference between "CAGR" and "compound interest calculator" in this example. They should give the same results - an initial investment P grows by X% per year - how much will it grow over T years? The answer should be
F = P * (1+X)^(T)
So reversing that to find the annual growth gives
X = (F/P)^(1/T) - 1
Normally, however, stocks do not grow by the same amount every year, so the CAGR is more appropriate since you don't care about the actual growth in any one year, you're looking for the average growth over the time period. For that all use need is the ending value (F for future value), the starting value (P for present value) and the number of years (T).
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Thanks.. The main question that I have with the "compound calculator" for stocks is that I am asked to give the compounding period ("how often" is the interest compounded: yearly, quartely, daily) and I am not sure which one is the right one to give for NON dividend paying stocks? Using "yearly" I get almost the same result as the "CAGR" calculator ( about 2 eur less). Do you know the compounding period for stocks? thanks Mar 31, 2021 at 14:03
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Stocks don't really "compound" at any frequency like bonds or bank account do. You could use any compounding period you want and calcualte the average growth over that period (monthly, quarterly, etc.) but they would all be equivalent to the annual growth rate if you annualize it property (e.g.
annual = (1+quarterly)^(4) - 1) Mar 31, 2021 at 19:24 -
I admit I do not make the calculation myself, I use an online "CAGR" and online "Compound interest calculator"... I just checked what would be the return amount if I give as compounding period monthly, quarterly or daily and I get on average a 10-15 EUR more..anyway Thanks. Mar 31, 2021 at 19:50
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Without knowing the exact inputs it's hard to say, but know that a 20% annual growth is not equivalent to a 5% quarterly growth; it's equivalent to a
(1+.20)^(1/4)-1 = 4.66%quarterly growth, so that may be why you're seeing slightly different results. Mar 31, 2021 at 20:49 -
Great. Thanks. Now I think I definitely understand it better as before Apr 1, 2021 at 9:15
Welcome.
Why is such a calculation important to you? How accurate does it need to be?
While not accurate it may be close enough to divide total return by the time period. In this case 150%/5 = 30%. The actually return is a bit lower, but is close. I like this method as it is pretty simple to find the approximate APR over days or months not just so many years.
For complete accuracy you can study Time Value of Money (TMV) calculations. There are some free mobile apps that will do this for you and spreadsheet formulas.
But again why?
If using this to compare some investments you can just compare the total return. The important thing to remember is that what was true then will not be true in the future. Comparing historical data yields very little information on what will happen in the future.
Since you are starting out, let me break down how easy investment is: Simply put all of your investment dollars in an S&P 500 index fund or ETF. The lower the fees the better, but that is it. Leave it there, let it grow. Contribute often. Once we get up to 100K or so you may want to diversify a bit, but you really don't have to.
Then work at your career. How can you earn extra dollars by serving others well? Once that question is answered use that extra cash to increase your investment holdings.
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I would not put everything into the US market. It may be the most important stock market right now, but that was Japan in the 1980s. Better add in a substantial portion of international stocks as well or go directly for a world index like the MSCI ACWI (or world + emerging markets) or the FTSE All World which are still like 60% US stocks– ManzielMar 30, 2021 at 12:32
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Thanks for your reply. The reasons I want to know and have this concept very clear are multiple....Starting with the fact that I want to calculate the ideal annual return I would need to try and achieve in order to get to a specific financial number I plan, and most importantly I want to understand and therefore find answers to all the questions marks that I have in my head, no matter how dumb or irrelevant for others they might be, because I seriously want to learn to invest. Also I am interested in investing in individual companies, not only index funds/ETFs... Mar 31, 2021 at 14:14