Tag: beginners guide

  • Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment - How To Know Where To Invest?
    The long-term returns seem attractive, and it is easy to start investing. But you must have realistic expectations.

    By Guy Avtalyon

    Good returns on investment is what every single investor wants. But some have unreasonable expectations. Especially beginners. They are hunting stupid high returns on investments and lose money. No matter what asset class is, they are looking for high rates of return. Nothing is wrong with that, but a dose of reality is necessary for investing. Dreaming is okay, of course since it can motivate us to reach our goals but if our dreams are unrealistic it can deliver us the stress when we unveil that reality isn’t like our dreams. 

    So, everyone including beginners in the stock market must understand what are good returns on investment. We would all like to become rich overnight, that is a legit dream but the real-life is something different. One of the main problems is that beginners don’t understand the effect of compounding nor how it works. Most of them don’t know what good returns on investment means, how much it is.

    First of all, temper your expectations. 

    Over almost the last 100 years, the stock market’s average return is about 10% per year. But returns are infrequently average. So, if you are one of the new investors you have to know several things about what good returns on investment is. 

    What are good returns on investment?

    You have to know that historical data shows that the average stock market return is 10%. Are you surprised? What did you expect? Oh, we know! You heard the stocks are among the riskiest investments and the high risk may provide you a high potential reward, right? That’s true but it will not happen overnight. Let’s go back to average stock returns. 

    The S&P 500 Index is the benchmark measure for annual returns. When we said the average annual return is 10% it wasn’t quite true. The truth is that you have to reduce this 10% by inflation. For example, if you start to invest now you can expect to lose buying power of 2-3% per year which is caused by inflation.

    The stock market is directed on long-term investments. That means you can invest your extra or saved money you will not need for the next five years or longer. If you don’t like this you may prefer a shorter investing period, for example, a year or two. Well, then the stock market isn’t for you. Choose one of the lower-risk alternatives. For instance, a savings account. Yes, you will have the lower returns, but you’ll be protected from stock’s volatility.

    As we mentioned above, the average return per year is 10%, but it is actually far away from average. There were periods when it was dramatically lower but also the periods when the returns were much, much higher. That’s due to the stock’s volatility. We have to say and this may sound illogical for beginners, but even during the volatile market’s years, returns can be good.

    Your expectations must be fair

    Honestly, you have to learn this. Especially if you’re a new investor. You may think you can earn 25% on your stock investments over several decades. We have to tell you, your expectations are extremely big. It’s not going to happen. Maybe this is rude to say, but that’s insane. Yes, we know you found someone out there who promised you that high returns, but you have to understand cush lied to you. Such is counting on your lack of experience, and on your greed. Are you greedy? Go to the casino! Start gambling! Stock investing is a serious job, hard work, also connected with a lot of pleasure and passion with one single most important goal – to have good returns on investment and over time, to provide financial security for yourself. Well, and maybe, just maybe you’ll become rich. 

    So, your financial foundation should never be based on dangerous opinions and actions. Don’t be irresponsible. What you really need is your investment to provide you a nice retirement, you wouldn’t like to end up with less money than you expected.

    The meaning of good returns on investment can be confusing for someone, particularly young investors because when you enter the stock market you might know only about a 10% annual return rate. But keep in mind, you don’t have guarantees that they are going to repeat themselves. The returns on investments never were a smooth or upward path. remember, markets are volatile and you may suffer great losses over time. But what is important and everyone should know that that’s the nature of the free-market. Over a long-time period, you’ll beat the market if you follow some rules.

    How to calculate the rate of return

    Let’s say you already have determined your investing goals. You clearly know what your target is. Also, you have to identify the amount of capital and time you have to invest. All information you need is in front of you. So, let’s see the magic of compounding.

    For example, you have $2.000 to invest. Assume that the annual rate of return is 10%. After one year you’ll have $2.200, right? But what if you want to sell your whole investment after 2 years, for example, for $3.000. Super done! Your profit is $1.000 which is a 50% return. Amazing! Oh, wait! You have to pay capital gains taxes. Take away 15% from your gain. Well, your profit isn’t $1.000, it is $850. You’re left with $2.850. Well, you still have good returns on your investment after two years. It is 42,50% now. Did we have inflation? Of course, we did. So, you have to count inflation of 4% for 2 years. 

    Let’s do it.

    $2,850×0.96×0.96=$2,626.56 

    That is 31.32% real return of your investment. This $2.626 amount still isn’t bad but it’s far away from your $3.000 and 50% where we started this calculation.

    Look, the annual rate represents the profit you earn on your investment per year, or how much will you get in return for each dollar invested every year.

    There is a simpler calculation. Just find a simple percentage. For example, you invested $1.000 and your gain is $300. What will your return be? 

    (300/1000)x100 = 0,3×100 = 30%

    This approximative value. But if you want to know the exact you’ll need the first calculation we showed you. That is a well-known ROI, return on investment.

    Can the stock market give you good returns on investment?

    The stock market is unstable and unpredictable, so you’ll never have any guarantees there. But if you consider this 10% average return you’ll understand that investing in stocks may provide you financial security in the long run.

    What are the good returns on investment today?

    Well, the answer is pretty complex but to make it simpler, use this rule of thumb: If the recent returns were higher than average, the future returns will be lower. 

    That’s why it is much better to calculate, for example, 6% or 7% of the average annual of return when estimating your returns over time. Because, as you can see, this average return is rare. It is higher or lower. Also, there is some psychological effect, if you expect too high returns you’ll be disappointed if your investment never gives you that. Also, you’ll be glad if your investments beat your expectations.

    The best approach in the stock market, if you want to make real money, is to buy stocks at good prices and sell them at a profit.  What is a good price? To figure it out you’ll have to know how much money you want to get when you sell it.

    Good returns on investment for an active investor is 15% per year. For this to reach you’ll need to be aggressive in looking for bargains. It isn’t hard to achieve. For example, your buying power can be doubled every 6 years if you have average annual returns of 12% after you pay all taxes, also, count the inflation for each year. This is one way to beat the stock market. The other is to become a trader but a smart one. The coronavirus is causing people from almost all parts of the globe to halt their activities. People are urged to stay home, schools are moving to online learning. Take this as an advantage and learn something useful, why not?

  • Adjusted Closing Price – Find a Stock Return By Using It

    Adjusted Closing Price – Find a Stock Return By Using It

    A basic mistake is considering the closing prices of stocks for analysis instead of Adjusted closing price. 

    If you’re a beginner in investing, you probably already noticed the expression like “closing price” or “adjusted closing price.” These two phrases refer to different ways of valuing stocks. While with the term “closing price” everything is clear when it comes to the term “adjusted closing price” things are more complex. 

    When we say closing price it refers to the stock price at the close of the trading day. But to understand the adjusted closing price you will need to take the closing price as a starting but you’ll have to take into account some other factors too to determine the value of the stock. Factors like stock split, dividends, stock offerings can change the closing price. So we can say that the adjusted closing price gives us more exact the value of the stock.

    What is Adjusted Closing Price

    Adjusted closing price changes a stock’s closing price to correctly reveal that stock’s value after accounting for every action of some company. So, it is recognized as the accurate price of the stock. It is necessary when you want to examine historical returns.

    Let’s say this way, the closing price is just the amount of cash paid in the last transaction before the closing bell. But the adjusted closing price will take into account anything that might have an influence on the stock price after the closing bell. When we say anything it is literally anything: demand, supply, company’s actions, dividends distribution, stock splits, etc. So, you will need adjustments to unveil the true value of the stock.

    It is particularly helpful when examining historical returns. Let’s do that on an example of dividend adjustment calculation.

    Adjusted Closing PriceThe adjusted closing price for dividends

    When a stock increases in value, the company may reward stockholders with a dividend. It can be in cash or as an added percentage of shares. Whatever, a dividend will decrease the stock’s value since the company will get rid of the part of its value when paying out the dividends. So, the adjusted closing price is important because it shows the stock’s value after dividends are posted.

    Subtract the amount of dividend from the previous day’s price. Divide this result by the same day’s price. Finally, multiply historical prices by this last figure.

    For example, the prior trading day was Tuesday and a stock closing price was $50. The day after, on Wednesday,  it starts trading at a last price minus dividend, for example, trading ex-dividend based on a $4, so the stock will be trading on Wednesday at $46. If we don’t adjust the last price the data, for example, the charts will show a $4 gap.

    What do we have to do?

    We have to calculate the adjustment factor,

    So, by following already described we have to subtract the $4 dividend from the closing stock price on Tuesday (in our case)

    $50 – $4 = $46

    Further, we have to divide 46.00 by 50.00 to determine the dividend adjustment in percentages. 

    46.00 / 50.00 = 0.92

    The result is 0.92.

    Let’s see how to adjust the historical price.

    The next step is to multiply all historical prices preceding the dividend by this factor of 0.80. This will alter the historical prices proportionately and they will stay logically adjusted with current prices.

    After stock splits

    Stocks split occurs when the price of individual shares is too high. So, the company may decide to split stocks into shares. When the company increases the number of shares, the logical consequence is the value of each share will decrease due to the fact that each share factors a smaller percentage.

    In our example, if the company splits each $50 share into two $25 shares, the adjusted closing price from the day prior to the split is $25. The adjustment reveals the stock split, not a 50% decline in the share price.

    New Offerings

    For example, the company decided to offer extra shares to boost capital. This means the company issues new shares of stock in a rights offering. The right offering means that the shareholders have the chance to buy the new shares at lessened prices.

    But what happens when new shares come to the market? The price of the shares, of the same company, that are already on the market will drop. How is that possible? Well, think! The number of shares is increased and each of them now cost less. It’s almost the same with a stock split.

    The adjusted closing price values the new offerings and the devaluation of each individual stock.

    Find a stock return 

    A stock’s adjusted closing price provides you all the info you need to watch closely to your stock. You can use some other methods to calculate returns, but adjusted closing prices will spare you time. As we see in the text above, adjusted closing prices are already adjusted. The dividends are posted, the stock’s splits are done, the rights offerings also. So we can make a more realistic return calculation. The adjusted closing prices can be an excellent tool that can help us improve our strategies. Moreover, we can do that in a short time since the adjusted closing price already took into account almost all factors that directly impact the overall return. For example, just compare the adjusted price for a particular stock over some given period and you will find its return.

    It’s easy to find historical price data, just download it. Further, mark the column of dates and a matching column for adjusted closing prices and set up in descending order. For example, you want to examine a period from March to October. On the top, you should have data for March and below data for April and so. 

    Let’s find the return

    Firstly, compare the closing price in one month to the closing price from the prior month. To unveil the percentage of return you have to divide the chosen month’s price by the previous month’s price. Subtract the number 1 from that result, then this new result you have to multiply by 100 to turn it from decimal to percentage form.
    It should look like this:
    In March stock price was $50, in April it was $55, so the return was 10%

    ((55/50)-1)x100 = 10

    Since you have to do this calculation for each month add the column for return if you are working in a spreadsheet.

    To calculate the average return for the given period, from March to October, just sum each return for all months you observe and divide the result by the number of months.

    Simple as that.

    Bottom line

    The adjusted closing price is a stock’s closing price on any chosen trading day but altered to cover dividends posted and the company’s actions like split shares and the rights offerings that happened at any time former to the next day’s open.

    So, you can see that for serious analysis, the closing price will never reveal the real value of the stock, the stock’s value after considering any company’s actions. So it is always suggested to use the adjusted closing price if you want reliable analysis.

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