Do we use simple interest rate to compute stock investment related question?

March 13th, 2010 by admin

I was giving the following question:
Jack purchased 100 shares of store at price of $25 per share. He hopes to double her investment. How long will it take if the stock price increases at a rate of 10% per year?

Since the money you earn by the increase of stock price will not be re-put into your investment. Therefore, it only make sense if I use simple interest to compute correct?

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    • One Response to “Do we use simple interest rate to compute stock investment related question?”

    1. clos057 says:
      March 13, 2010 at 5:09 am

      Simple interest can be used, but when you are trying to figure out how long it will take for an investment to double, then you should use the Rule of 72. This will tell you the number of years it will take for your money to double but only when the interest(rate) is compounded annually. You simply take “72″ and divide that by the interest rate. In this case 72/10 = 7.2 years until your money doubles. This also works the other way around if you want to know what interest rate you will need in order to double your money in the desired time frame, (72/6 years = 12% required interest rate. Hope that helps.

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