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Finance: What is an Annualized Return? 36 Views

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Description:

When you buy and sell something for investment purposes, whether it be a stock, artwork, gemstones, a bond, a condominium, you know that once you have sold the asset, you have a cost basis, a sale price, and a profit or loss. However, one asset may have made you a 50% profit and taken 15 years, whereas another might only have made 25% but took just two years. How do you quantify which was the investment that earned at a better rate for you? Does compounding enter into the equation? Did the investment asset cost you additional money over the period, such as maintenance, repair, insurance, etc.? These are all factors that are calculated to equate to an annualized return rate, which takes the total return and spreads it out over the period of time it was held, amd averages it out over a 12 month period.

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Transcript

00:00
Finance, a la shmoop. What is an annualized return? Alright people, well
00:08
when you invest a dollar you hope or even expect to get more than a dollar [ATM machine]
00:13
back, at some point. And let's say you invested that dollar in Terminators
00:18
Closet -a leading dealer in cybernetic body enhancements. And it went from $1 a
00:23
share to a dollar ten six months later. Alright, nice return.

00:27
You made 10% in just six months but in most investing discussions ,investment [spreadsheet shown]
00:32
returns are discussed in the form of annual returns, not monthly or daily or
00:38
biannual numbers, so you need to convert your six-month return into an annualized [angelic glow]
00:45
one, and you can do the process here of computing that number that is if you made
00:50
10% in six months well then in a year presumably you could notion that you'd
00:55
have made 20%. It's not that you would have guaranteedly made 20% it's just [spreadsheet shown]
01:00
the math saying that well if you had compounded at that rate then you'd have
01:04
made 20%, so what if she made 10% in a month? Well the stock went from a buck a
01:08
share Jan 1 to a buck ten a share by Feb 1 .Well if you impute so that you can [calendar shown]
01:15
compute that month's gain of 10% would carry a compound rate of a hundred
01:20
twenty percent. Right ? You're multiplying 12 months times 10 there, that'd be
01:23
annualizing it meaning, that at that rate you are more than doubling your money on [spreadsheet shown]
01:27
an annualized return basis. And that's more than enough dough to keep
01:31
terminators closet popping out those Wi-Fi enabled contact lenses faster than [woman watches TV]
01:36
people can wear them.
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