Stock investments offer opportunities for profit through capital gains and dividend earnings. When analyzing a stock's value, different factors portray profits and earnings in different ways. The nominal growth rate calculation of stocks provides a face value appraisal of a stock's earnings. In actuality, nominal growth rates provide a starting point for determining how other factors affect a stock's overall value.
Nominal Growth Rate
A stock's nominal growth rate represents the amount and rate of interest a stock has earned within a given period of time. A company provides a report on its stock's nominal growth rate, which can go up or down depending on how a stock fares in the market. And while a particular stock can increase or decrease in value, other factors such as inflation and taxes affect the actual value of a stock's earnings. The nominal growth rate provides the first piece of information needed to calculate a stock's real value.
Purchasing power indicates the value of an amount of money within a current market environment. Because factors such as inflation and deflation can add to or take away from the actual value of money, the purchasing power of a dollar changes as the economic environment changes. The nominal growth rate calculation of a stock only provides information on the amount of money invested versus the amount of profit made (or lost). Determining actual purchasing power of a profit gain requires investors to deduct the market's current inflation rates from a stock's nominal growth rate amount. These calculations provide the real growth rate, or real interest rate, made by a particular stock. The real growth rate amounts to the actual purchasing power of a profit gain.
The effects of inflation can potentially leave an investor with less purchasing power than when the investment was made. When factored in, inflation rates can convert a nominal growth rate gain into a net loss depending on the numbers involved. For example, an inflation rate of 7 percent and a nominal growth rate of 6 percent equals a -1 percent real growth rate. Under these conditions, the value of the stock has decreased below the amount of money spent to purchase it. In effect, inflation factors decrease the value of profits made as well as the actual value of the principal investment.
The effects of deflation on a stock's nominal growth rate can work to increase the real value or purchasing power of the principal investment made. Deflation, in general, reduces interest rates and product prices within a market. And while a stock's nominal growth rate may suffer as a result of deflation, the actual profit made holds more real value, or purchasing power, within a deflated market. For example, a nominal growth rate of 2 percent coupled with a deflation rate of 1 percent equals a 3 percent real growth rate. As a result, the effects of deflation produce a net gain in terms of the stock's real growth rate and purchasing power.
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