When evaluating the price, look at the potential return and the risk you must take to get that return.

When it comes to evaluating the price of a stock, you're really interested in just 2 things:

1.  The potential return, and
2.  The risk you must take to get that return.

If the potential return is worth the risk, the price is right.

If it is not, you can simply wait until it is.

As volatile as the stock market is, most stocks will sell at a favourable price sometime during the year.

To estimate the potential return, you will have to come up with a reasonable forecast of how high the price might go.  Knowing the hypothetical potential high price, you can estimate the potential return.

To evaluate risk, you will need to conservatively estimate the stock's potential lowest price.  If your potential gain is at least three times as much as you risk losing, your stock is probably selling at a fair price.



For example:

Stock TUW

Potential high price = $20
Potential low price = $10
Market price = $12

Potential gain = $20 - $12 = $18
Potential loss = $ $12 - $10 = $2
Therefore, potential gain : potential loss = $8 : $2 = 4 : 1

As the potential gain is at least 3x as much as you risk losing, the stock is probably selling at a fair price.

Understanding Risk and Return tradeoff

Your money's job description and your principal financial goal: "Work to give a real rate of return."

Return is a very important concept in the investment world.  It is simply the difference between the money you start off with and the money you end up with.  In other words, how your money has grown. 

The rate of return is the pace at which you achieve that growth, and is normally expressed as a percentage per year. 

The nominal rate of return does not take inflation into account, while the real rate of return is the nominal rate of return less the inflation rate.

E.g.

Nominal rate of return for FD 4%
Inflation 3%
Real rate of return for FD 1% (4% - 3%)

You should learn how your money can work for you to increase over time and to beat inflation.

Your money should give you a real rate of return.  This should be your money's job description and your principal financial goal.

Risk and Return

Risk and Return


Any investor needs to ask themselves the following questions:

• How long can I invest for?
  


• What is the worst case scenario?
  


• Can I tolerate fluctuations in returns?
  


• What level of return do I need to match any future liabilities?
  


• Do I understand the characteristics of different asset classes?
  


• How do I achieve an objective investment process to meet my profile?

It is the mix of assets that drives returns. Some 75% of the return on a portfolio may be attributable to getting the choice of assets and geographical markets right over the medium term.



Our role as portfolio managers, once you have selected the portfolio, is to actively manage your assets in the global markets within the parameters we have established with you.


Remember this is your personal choice and reflects your emotional response to risk and your expectation of return.



Once you have decided where you feel most comfortable we can then determine the asset allocation that best matches your individual profile.



http://offers.telegraph.co.uk/content-10027/

Return

Return is the primary motivating force that drives nvestment. It represents the reward for undertaking investment. Since the game of investing is about returns (after allowing for risk), measurement of realised (historical) returns is necessary to assess how well the investment manager has done. In addition, historical returns are often used as an important input in estimating future (prospective) returns.

The Components of Return

The return of an investment consists of two components.

Current Return: The first component that often comes to mind when one is thinking about return is the periodic cash flow (income), such as dividend or interest, generated by the investment. Current return is measured as the periodic income in relation to the beginnin price of the investment.

Capital Return: The second component of return is reflected in the price change called the capital return - it is simply the price appreciation (or depreciation) divided by the beginning price of the asset. For assets like equity stocks, the capital return predominates.


Thus, the total return for any security (or for that matter any asset) is defined as:

Total Return = Current Return + Capital Return

The current return can be zero or positive, whereas the capital return can be negaive, zero, or positive.

Risk and Return - Two Sides of the Investment Coin

Investment decisions are influenced by various motives.

Some people invest in a business to acquire control and enjoy the prestige associated with it.

Some people invest in expensive yatchs and famous villas to display their wealth.

Most investors, however, are largely guided by the pecuniary motive of earning a return on their investment.

For earning returns investors have to almost invariably bear some risk.

In general, risk and return go hand in hand.

While investors like returns they abhor risk.

Investment decisions, therefore, involve a tradeoff between risk and return.

Since risk and return are central to investment decisions, we must understand what risk and return are and how they should be measured.

Understanding Stock Market Return

Stock market return

= fundamental return + speculative return

= (earnings growth + dividend yield) + (change in PE ratio)

http://turtleinvestor888.blogspot.com/2008/03/is-there-such-thing-call-value_19.html