Course 304:
PEG and Payback Periods
In this course
1 Introduction
2 Payback Period = Double Your Money
3 The Longer the Payback Period, the Greater the Risk

If you own a home or a car, you are probably all too familiar with what happens when you take out a loan. A bank lends you a certain amount of money that you must pay back at a specified rate, such as one payment per month for five to 30 years. In exchange for taking a risk that you won't repay the loan, the bank earns some revenue on top of its investment, based on the interest rate it charges. As a shareholder in a company, you're a lot like a bank. When you buy stock, you're in essence lending a company your money so it can buy what it needs for its business and (hopefully) grow. You get paid back as the company's earnings grow and its stock appreciates. But whereas a bank clearly establishes its profit margin and a timetable for being repaid, shareholders aren't that lucky. (It's a different story for bondholders, who literally loan the company money and do get scheduled interest payments.) It is possible, however, to estimate what you may earn on your investment and when you'll earn it by examining a stock's payback period.

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