Annual growth rate is a term investors use to define the return they expect to receive from a stock purchase. Calculating annual growth rate helps an investor determine whether to retain or sell a stock, as well as assess current value when compiling the value of an investment portfolio as a whole. There are two formulas you can use to determine annual growth rate that include a formula to calculate a simple return, or a formula to calculate the compound annual growth rate.
Calculate Annual Growth Rate Using the Simple Rate Formula
Examine the simple rate formula. The basic formula is Return = (Net Proceeds + Dividends)/Total Cost – 1. Breaking this formula into its individual components shows how to arrive at the component numbers: Net Proceeds = shares sold x price received per share – broker commission sales fee Dividends = shares x dividend per share Total Cost = shares purchased x price paid per share + broker commission purchase fee
Insert your numbers into the simple rate formula. As an example, assume you purchase 200 shares of stock at $25 per share, and a broker purchase commission of $30. You receive a stock dividend of $1.50 per share, and then sell the stock for a price of $32 per share, with a broker sale commission of $35. Net Proceeds = 200 x 32.00 – 35.00 = $6365.00 Dividends = 200 x 1.50 = $300.00 Total Cost = 200 x $25.00 + 30.00 = $5030.00
Complete formula calculations to determine your annual growth rate. Using the example numbers, your annual growth rate is 33 percent. (6365.00 + 300.00)/5030.00 – 1 = 0.325
Calculate the Annual Growth Rate Using the Compound Annual Growth Rate Formula
Examine the compound annual growth rate formula. The formula is an adjusted version of the simple rate formula. The basic formula differs in that you eliminate the -1 from the end of the formula, then adjust the return by dividing the number 1 by the number of years you hold the stock and using this number as an exponent. Finally, you subtract the number one from the answer to arrive at a compound annual growth rate: Compound Annual Growth Rate = adjusted simple return (1/years) - 1
Insert your numbers into the annual compound annual growth rate formula. Using numbers from the example above, add the number “1” back into the simple rate. Assume you hold the stock for five years: Compound Annual Growth Rate = 1.33(1/5) – 1
Complete formula calculations to determine your compound annual growth rate. Usig the example numbers, your compound annual growth rate is 5.9 percent. 1.330.2 – 1 = 0.0586 = 5.9
In general, using the simple rate formula works well for short-term stock investments. The compound annual formula works better for longer-term stock investments as it takes the time value of money into consideration.
To use the compound annual formula as a “What if” analysis tool, change number of years you hold the stock. Annual growth rates will change as the number of years you hold the stock changes.
If you do not have a scientific calculator, use a spreadsheet program or an online scientific calculator.
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