Assessing inventory duration involves the ability to identify market trends.
Stock duration is a term often associated with the structure of stock options and has to do with the relationship between the change in the price of those stocks and a change in the delivery of returns on those stocks over the long term. Understanding how changes in prices will affect the returns generated by stocks makes it easier for investors to project expected returns if the stocks are held for a specified period of time, allowing for the incidence of the price change and the resulting change in returns. Assessing the duration of stocks involves the ability to identify market trends and apply them to the stocks in question, resulting in the ability to better understand the odds of making a profit from the stake.
One benefit of projecting stock life is that the process motivates investors to consider the market in more detail.
Projecting the duration of stocks typically involves using a specific formula to determine what is known as a dividend discount. To make use of this approach, it is necessary to identify the discount rate that applies to the stocks, as well as the expected growth rate for those stocks over a given period of time. The approach will require allowing for a 1% change in anticipated return, with that change being positive or negative based on what is expected to happen in the market.
Depending on what is likely to happen to the stock’s market value during the period under consideration, the stock’s duration may indicate a favorable or less than desirable return. Based on this information, the investor can decide whether it is worth acquiring or holding the asset or whether the asset should be sold in favor of acquiring shares with a more attractive duration. The process is only effective if the movement of the market and the effect on the returns generated by the stock are accurate. If the stock performs differently from the projections, this favorable gain can turn into a loss or vice versa.
As with most strategies used to anticipate the growth of an asset, the duration of the stock requires an accurate assessment of what will happen to the stock in the future. This makes it easier to identify whether future movement is likely to be favourable, what impact changes in interest rates might have on dividends generated, and whether or not the anticipated growth is sufficient to justify buying and holding the stock. A benefit of projecting the duration of stocks is that the process motivates investors to consider the market in more detail, something that can also be useful in assessing the potential of other holdings traded in the same market.