How to Calculate the Probability of a Future Asset Price

by Geri Terzo

Investing in the financial markets involves setting goals and taking strategic steps to reach those expectations. While there are no sure things when it comes to directing money into the financial markets, there are formulas to help manage the investment process. Calculating the probability of a future asset price is one step that can increase the chances of making solid investment selections and earning desired profits.

Stocks

A common asset to use when calculating the probability of a future price is a stock. Prices are readily available via a listing company's public resources, which makes it possible for individuals or financial professionals to obtain and assess a stock's trading course from various perspectives. While a stock's past performance can provide some gauge for future performance, it also shows the potential volatility, or price extremes, that a stock can reach. Even for the most experienced investors, it is difficult to chart a stock's future course, according to a study published by the Princeton University Press in 2005.

Historical Performance

History generally is a trusted teacher in the financial markets. It allows a market participant, such as an investor or technical analyst, to grasp the upward and downward potential of an asset based on historical performance. Often, it is useful to illustrate an asset's performance over a number of years -- such as a decade -- so that a fair representation of the financial security's tendencies is achieved. As a result, an investor should expect to remain exposed to the stock for a similar duration to potentially achieve similar returns.

Formula

To determine the probability of a future asset price in the stock market, identify a pair of pricing points. These prices should include one representing a historical value (such as 10 years ago) and a second price illustrating a more recent value (the most recent closing price.) Label the two price points as point A (to represent historical price) and point B (for the more recent asset value.) Subtract point A from point B. Divide the result by point A and multiply by 100. The result is the stock's growth rate over a 10-year period, which can be viewed as a probability of future asset performance.

Considerations

Companies that list stocks in the financial markets have the ability to adjust an asset's value. One such strategy is known as a stock split, which is when the price of a security is essentially cut in half to attract additional investors, for instance. When measuring the growth rate of a stock, factor in any manipulation or change to the price to reflect the true performance of that security. Calculate the split-adjusted value, according to "USA Today," which requires adjusting the historical stock price to split status.