Stock Premium Tips for Profitable Investment Stock premium is an extremely essential concept in today’s investing scenario. It contributes a significant portion towards investment profits. Idea behind stock premium is higher rewards keep up with greater risks. Get the stock premium tips to make your investment a wise decision. What is Stock Premium? Stock premium is the return an individual stock provides at the risk-free rate. In order to have a thorough understanding for stock premium, you firstly need an understanding of the risk-free rate. Risk and Risk-Free Rate Investment with stocks always brings risk, and the risk involved is usually higher than it is in debt investment. There are no guaranteed payments for stock investments. You need to have confidence that company’s stocks will increase in its worth over the time. A possibility is always there to decrease in value. It is the risk involved in it. Going down in the value of stocks if company fails, the more rewards if succeed. It is the risk-return tradeoff. The risk-free rate does not account for risk involved in investments. It helps compensate investors for critical issues such as inflation. Risk free rate generally deals with the long-term government bonds. Calculating the Stock Premium Investors expect higher returns when riskier investments are involved. The expected return helps determine the premium of a particular stock. The calculation of stock premium is mostly dependent upon the judgments and estimates of investors. There are three steps involved in calculating premium of a stock. Estimate expected return on stocks. Make estimation for the risk-free rate. Deduct risk-free rate from overall expected return. Mathematically, Stock Premium = Expected return on stocks - risk free rate Estimating the Expected Return The most viable way to complete this step is to use the expected return with a standard stock index, such as S&P 500 or Dow Jones Industrial Average. It helps determine an estimate of the expected return for all stocks. It’s quite probable to get a correct estimate for expected return by just spotting the average of historical returns, index has experienced.
Finding the Stock Premium Once the stock premium of the overall market is determined, you can easily compute the stock risk premium for an individual stock. You can find stock premium by multiplying market risk premium by the individual stock's beta coefficient. Beta coefficient revolves around 1. Lower betas represent less volatility and higher beta value represents more volatility than the market. ‘Normal’ Stock Premiums The calculation of stock premium may be an unrealistic rate of return. Investors usually expect stock premium of around 5%. Some academic studies suggest that this figure may be inaccurate and a reasonable risk premium is around 2.5%. A Long-Term Prediction
Stock premium provides prediction to which extent the riskier stocks will outperform less risky bonds in the long-term investment. There is no assurance for predictions to turn into reality, but stock premium is a superior choice when you are picking stocks for worthwhile investments. Premium for stock future deals with F&O trading. Get premium stock future tips to maximize your return in futures trading. Get professional assistance from stock premium tips experts for bagging profitable stocks. For more details visit at: http://www.stockaxis.com/premium-stock-tips.aspx