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Financial Times Guide to How the Stock Market Really Works, 5th Edition by Leo Gough

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Appendix 1

A little financial maths

People don’t like doing sums, but if you are going to be a successful investor you will have to learn how. This section introduces a few important notions which you need to be familiar with.

Payback

Payback is a remarkably simple rule-of-thumb method of assessing investment propositions. It is used in the boardrooms of large companies to help decide whether or not to go ahead with, say, the introduction of a new product or the building of a new factory.

Suppose the cost of purchasing a widget-making machine is £5 million. How long will it take for the profits on the widgets it makes to reach £5 million? That’s the ‘payback’time – the time it takes to recoup the initial investment. Companies like to see a short ...

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