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Finance GlossaryCompounded Annual Growth Rate (CAGR)
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Compounded Annual Growth Rate (CAGR)

Definition of Compounded Annual Growth Rate (CAGR)

Compounded Annual Growth Rate shows how much returns on average an investment can generate over a year, given the data for a period of time (say 5+ years).

CAGR is an indicative measure of yearly returns growth that assumes the profits are reinvested. The formula to calculate Compound Annual Growth Rate is:

CAGR = [(Ending value/Beginning Value)^(1/N)]-1

Related Terms

Equity

Equity is generally defined as a stake or per share ownership in a company. That's why stocks are often called equity or equities. In the broader markets, equity is also used to refer to the total amount of money shareholders stand to get in case a company is liquidated.

Arbitrage

Arbitrage is a strategy where a security is bought in one market and sold in another market to generate profits due to the difference in price. This difference is known to be minor.

Say for example a share trades at Rs. 1000 on NSE and Rs. 1002 on BSE. The share can be arbitraged by buying it on BSE and selling it on BSE for a profit of Rs. 2.

Cash Ratio

A cash ratio measures a company’s ability to fulfill short-term debt obligations using only its cash and cash equivalents, which are known to have high liquidity. The formula for calculating cash ratio is:

Cash Ratio: Cash + Cash Equivalents / Current Liabilities

Bull Market

Bull market is a positive trend in the stock market where price of shares increase by 20% or more after falling by 20%. Investors may say they’re bullish or expect a bull market to arrive when they believe that there will be prolonged periods of increase in the stock market.

Long-Term Capital Gain Tax

Long-term capital gain tax is the tax imposed on profits from selling shares or financial securities held for a period of at least three years. The tax rate applied is typically lower than the short-term capital gains tax, which are profits from the sale of shares held for a shorter duration.

Beta Stocks

Beta of stocks measures the risk that the shares carry compared to the broader market. Theoretically, the market is said to have a default Beta of 1. As a result, Beta stocks can be of four types:

  • High Beta Stocks : typically having a Beta value of more than 1, these stocks are known to be high-risk, high-reward investments
  • Low Beta Stocks : typically having a Beta value of less than 1, these stocks are known to be low-risk, low-reward investments
  • Negative Beta Stocks : typically having a Beta value of less than zero, these stocks are known to have an inverse correlation with the market
  • Same as the market : typically having a Beta that’s equal to 1, these stocks are known to share characteristics with the market



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