Evaluating the potential risks and rewards of an investment is critical in accruing wealth over time. It is important for investors to figure out which stock will perform better and will increase its value. Similarly, there are a variety of investment types and classes an investor can choose from.
Investors should possess a considerable amount of knowledge regarding stocks and money markets. Thus, the following are several tips on how to effectively evaluate the potential of an investment.
Assess the net worth of your investments
Assessing the net worth or the so called financial standing of your investment is the first and foremost step in determining the future potential of your investment. Investors can easily weigh the value of their investments through public listings in the stock and money markets.
An investment also increases its value whenever dividends or interests are declared. In such case, the investment carries with it the fair market value of the dividend or interest.
Review the recent trends in the stock/money market
Investors should regularly review the recent trends in the market. Stock and money markets are very vulnerable markets. They can easily be affected by changes in the political and social landscape not just of the parent country but also of neighboring countries.
Stocks may drastically increase or decrease in value whenever crucial changes in the political and social structure arise.
Calculate the internal rate of return
The current net worth of an investment is different from its future value. In determining its future value, investors must first calculate its internal rate of return.
In calculating the internal rate of return, discount rates and nominal rates are used. The internal rate of return considers factors such as potential income and prospective dips in the stock market.
Benchmark your investment against the same class of financial assets
Benchmarking your investments against investments of the same class is one way to gauge the performance of your investment. Your investment might be increasing its value but it may be underachieving compared to other investments of the same class/industry.
Study the company’s annual financial reports and statements
Financial reports and statements such as a company’s balance sheet, income statement and cash flow reports can be easily obtained from the company itself. A balance sheet presents the current financial condition of a company while the income statements and cash flow reports show respectively the performance and the amount of cash generated by the company.