Investing 101 !

The return an investor can make on an equity position is divided into two sections: capital and dividend gain.

Capital gain encompasses the appreciation in the price of the asset, compared to when it was first bought. The difference between those two values is the capital gained by the investor, after selling. This value can be expressed as a percentage by dividing the difference by the initial cost amount.

Some equities pay investors a dividend: a portion of the profits to thank shareholders for owning the asset. This is not mandatory but facilitates a healthy relationship between the company and its shareholders. If an asset pays a dividend, this is included in the return yield. The dividend yield can be calculated as the annual dividend per share divided by the current share price.



Return Yield

Fundamental Valuation Indicators

Financial Analysts from banks and research houses cover companies and the evolution of their business. In this process, they issue estimates about the EPS and Sales of a company for the next 12 months, and these can be compared with the realized metrics for the company for the past 12 months to gauge what kind of growth the analyst community is expecting for the stock.

Analyst Expected Growth helps gauge the views of the analyst community on the growth potential for the stock. This can either have predictive power or - as sometimes happens - be more of a contrarian indicator: in some cases, when all analysts are one-sided on the trade, it’s a sign to do the opposite.

Discounted cash flows, an absolute valuation method, rely on growth expectations to predict future cash flows and hence potential stock prices. Investors can use analyst expected growth as a benchmark for their own growth expectations.