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.
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 (
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.