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Stock markets are inherently volatile. Sudden upheavals—most recently the COVID-19 crisis—can send the market reeling, which makes predicting your investment's exact future value pretty tricky.
But while you can't foretell exactly how or when the market could change, a (relatively) simple formula can help you predict your stock's future value based on current market conditions: the future value formula.
There are a few different versions of the future value formula, but at its most basic, the equation looks like this:
future value = present value x (1+ interest rate)n
Condensed into math lingo, the formula looks like this:
FV=PV(1+i)n
In this formula, the superscript n refers to the number of interest-compounding periods that will occur during the time period you're calculating for.
For instance, let's say you're purchasing stock valued at $1,000 with a yearly interest rate of 10%. If you want to know your investment's future value after five years, your equation would look like this:
FV = $1,000 x (1 + 0.1)5
After running the numbers, you'll find that your investment's future value after five years is $1,610.
Note that the future value equation above calculates an investment's future value with compound interest, not simple interest. With compound interest, an asset earns interest on both the initial deposit and the interest that accrues each year. In other words, you earn interest on your interest.
With simple interest, an investment accrues interest based solely on the initial investment amount. The interest that adds up as the years pass comes from only your principal amount, not the interest earned on that principal.
If you're trying to calculate the value of an investment that accrues simple interest, your future value calculation will look like this:
future value = present value x [1 + (interest rate x time)]
Simplified into math values, the FV formula looks more like this:
FV = PV[1+(r x t)]
Returning to our example above, the calculation for the five-year value of a $1,000 investment and 10% (simple) interest rate looks like this:
FV = $1,000 [1 + (0.1 X 5)]
With a simple annual interest rate, your $1,000 investment has a future value of $1,500.
If you know your way around a graphing calculator, you can work out an investment's future value by hand, using the equations above. You can also use an online future values calculator or run the formula on spreadsheet software like Excel or Google Sheets.
For instance, on Excel, if you go to the Formulas tab, then the Financial tab, you can click "FV" to generate a future values calculation. However, the equation will look pretty different from what you're used to. You can check out Microsoft's tutorial on how to calculate future value in Excel . . . or, instead of using the Excel-generated formula, you can just enter the numbers you're running and create an equation using the = sign.
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Spreadsheet software and online calculators can also help you make these future value–related calculations:
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You can calculate future value with compound interest using this formula: future value = present value x (1 + interest rate)n. To calculate future value with simple interest, use this formula: future value = present value x [1 + (interest rate x time)].
In the future value formula, n stands for the number of interest-compounding periods that occur during a specified time period. For instance, if you're calculating an investment's worth after five years, and interest on the investment is compounded annually, n would be 5 in the equation.
Depending on the model, your calculator might be equipped with a built-in FV calculation. For instance, on the Texas Instruments 84 model (the most popular calculator for math and finance classes), you can find the formula under the calculator's finance section. Alternatively, if you have a graphing calculator that can perform more complex math functions, just enter the numbers and run the calculation yourself.
For example, if you're trying to calculate the future value of a $500 investment with a 5% compounding annual interest rate over a period of 10 years, you'd key this into your graphing calculator:
500(1+.05)^10
You can also find a variety of future value calculators online.
Making money on an investment is rarely a given—the stock market is too unruly for that. But using the future value formula before you invest can increase your chances of picking the right stock at the right time.
Trying to make your own business more appealing to investors? Check out our piece on the most important financial documents for showcasing your financials for would-be shareholders.
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