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You must've seen “Expected Return” in the dashboard of different stocks and now, you want to know what that means. Well, the return of a stock is one of the most valuable metrics you should watch out for.
Why should you care about the return of a
stock? What really is a stock’s expected return? Read this article to find out.
What Is Expected Stock Return?
The expected return of a stock is simply
what financial analysts expect a stock to return after a year of investing. If a
stock's expected return is 15%, financial analysts say that if you buy ₦1000
worth of the stock today, you should get around ₦1150 next year.
A stock’s expected return is calculated by
getting the average of its annual return for the past 3-7 years.
3 Reasons Why Should Consider the Expected Return?
1. It Gives You A Historical Overview of an Asset’s Rewards
for Investment
They say that nothing is new under the sun.
Except something mind-blowing and surely newsworthy happens to a company,
there's no reason why the company should outperform its past. Likewise, if something terrible happened to or is happening to a company, there's no reason
why the company should significantly underperform its past.
2. You Can Compare Different Assets Using Their Returns
If you want to choose between different
assets, comparing them using their expected return is a good strategy. Go for
the stock with the highest return, all other things being equal.
3. You Can Tell the Assets That Best Suits You
Surely, looking at the returns and other
native of a stock can help you tell if the stock or any other stock is suitable
for you. Make use of the information for better data-backed decisions.
3 Best Practices in Analyzing a Stock Expected Return
1. Go For Assets with Suitable Expected Returns
If you're big on the Assessworth platform,
you'd agree we always advise that you know and stick to your investor type.
When you know your investor type and have a required return, do not go for
stocks with a lower return than what you expect. It's that easy.
2. Compare Your Portfolio Returns with the Stock Expected
Returns
When you have a stock in your portfolio,
how can you tell that this same stock is underperforming? The best way to do so
is to compare what you've gotten in returns what the expected return of the
stock.
On your portfolio page in the Assessworth
platform, you can look at the annualized return of the stock. Comparing the
annualized return of that stock with its expected return is a great way to tell
if the stock is performing well or not.
3. Study the Company Financials
Please note that the “expected return”
metric is the product of the historical data of the company. This means that if
you rely solely on the returns as anticipated, you may be investing with a
reactionary approach.
To invest so that you will be the market
that others will analyze, you have to analyze the financials of the company.
Look at the profits, debts, cash flows, and other metrics of the company.
3 Things To Consider When Analyzing Expected Returns
1. It Reflects the Market
This is just an explanation of the point
above. Financial analysts study the financials of a company and make their prediction
that this company will perform well or not. This in turn affects the demand of
the company, which affects the price.
The expected return of a stock studies the
price movement of the stock. Therefore, if you work with the expected return
alone, you are working with the product of people's analysis and reaction.
If you want to be the one who analyzes the
company by yourself, you have to study the financials of the company.
Thankfully, we provide you with the tools and resources that you need for the
analysis in the Assessworth platform.
2. It Changes Regularly
Remember that the Assessworth platform is a
real-time platform. This means that there's nothing static in the platform. If
you check the expected return of a stock on two different dates, you may see
two different expected returns.
This is because the prices of stocks change
daily and thus, the average return must change. Always go for the current
expected return.
3. Combine Expected Return with Other Metrics
You already know about the financials of a
company. However, even if you do not like financial numbers, there are other
metrics to consider before deciding if you'll invest in a stock or not. You can
use the risk exposure, risk-return ratio, earnings per share, etc. to make your
decision.
Conclusion
Surely, the expected return of a stock is
an invaluable insight for investors. You agree, don't you? Always remember to
check and note the expected return of a stock when you are viewing the metrics
of that stock. Happy investing!
