How to use mathematics to get the most out of your investments
Mathematics is the language of finance. It is used to describe financial instruments, to value investments and to manage risk. A solid understanding of mathematics is essential for anyone who wants to make the most of their investments.
There are a few key concepts that every investor should know. These include:
The price-to-earnings ratio, or P/E ratio, is a measure of how much investors are willing to pay for each $1 of a company's earnings. The P/E ratio is calculated by dividing a company's stock price by its earnings per share.
A high P/E ratio means that investors are willing to pay more for the company's earnings. A low P/E ratio means that investors are willing to pay less.
P/E ratios can be used to compare different companies or different sectors. A company with a high P/E ratio may be seen as more risky than a company with a low P/E ratio.
The dividend yield is the percentage of a company's stock price that is paid out in dividends. It is calculated by dividing the annual dividend by the stock price.
A high dividend yield means that investors are getting a lot of dividend payments relative to the stock price. A low dividend yield means that investors are getting few dividend payments relative to the stock price.
Dividend yields can be used to compare different companies or different sectors. A company with a high dividend yield may be seen as more attractive than a company with a low dividend yield.
Compound interest is when interest is earned on both the original investment and on the interest that has been previously earned. This can cause investments to grow much faster than if simple interest was earned.
Compound interest is often called the eighth wonder of the world because of its ability to grow an investment.
To take advantage of compound interest, investors should reinvest their dividends and any other earnings. This will cause the investment to grow at a faster rate.
Mathematics is a powerful tool that can be used to get the most out of your investments. By understanding key concepts such as P/E ratios, dividend yields and compound interest, you can make better investment decisions and grow your portfolio.Posted on Sep 01, 2022, in Investment and tagged P/E ratios, Dividend yield, Compound interest
Any information contained within the contents of this blog are opinions and suggestions of the writers and do not necessarily reflect any policies or positions of the credit union. Any reference made to products or promotions are not guaranteed at any time. This information is not intended to be considered financial advice. It is provided for your education only. Community 1st Credit Union is Federally Insured by the NCUA.