Mathematical formulas for stock market

Author: Neono On: 18.07.2017

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Whether you love to buy and sell stocks or barely understand what's going on in your retirement account, there's a good chance you could benefit from learning more about the math behind the stock market.

Here are three fundamental equations that the savviest investors know.

Relatively easy to understand, they will help you choose the right stocks and funds and, most important, keep your expectations about future returns grounded in reality. This formula, known as the Gordon equation, assumes stocks get their ultimate value from being able to one day return earnings to investors.

Mathematics in the Financial Markets : wixequj.web.fc2.com

That's true whether or not a company currently pays a dividend or reinvests in the business. Anything above or below that is a result of investor sentiment. So today the expected long-run return is 6.

mathematical formulas for stock market

Adviser and author William Bernstein says thinking about this number brings you down to earth in boom years, and can reassure you when the market is down. But math professor Jordan Ellenberg, author of How Not to Be Wrong , says that over many years "expenses add up—or, more mathematically precisely, they multiply up. With the same pre-expense return in a very low-cost index fund charging 0.

mathematical formulas for stock market

To see for yourself the true long-term costs of a fund you are considering, use the mutual fund fees calculator at Bankrate. Return on equity is a classic measure of a company's ability to put shareholders' money to good use.

mathematical formulas for stock market

Equity is roughly the cash investors put into the business, plus retained earnings. Calculate a stock's ROE using the balance sheet and income statement. Read more investing fundamentals from Money How do I know if I should buy a stock? Should I invest in stocks or in a stock mutual fund?

How often should I check on my retirement investments? Net Worth Here's How Much Money Americans Say You Need to be 'Wealthy'.

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