Finance

# Why is CAGR used?

Investments can be tricky because there are lots of factors that you have to know and calculate, and it is a must that you should learn about all of these factors and formulas to perform better in the economic market.

There are many topics regarding investment, but you have to keep in mind that we cannot cover all of the aspects in one article, so one by one, we will proceed.

First, we want to talk about the CAGR, which is the essential part of the investment; further into the article, we will tell you all about this logic, the way of calculating it, and what it is used for strictly.

Imagine that you are investing in a project and want to know the total interest and gain you would have at the end of the investment duration.

This is where the CAGR comes in; you must use this formula and logic to calculate all these factors.

Now, if you are ready and as excited as we are, let’s get started with the article, shall we?

## What is CAGR?

First, we have to talk about the CAGR itself.

Compound annual growth rate, this is what CAGR stands for, but you might be confused about what even this means; worry not, we will elaborate.

Imagine that you are trying to invest in a tech company for at least two years, and you want to figure out what percentage you will be interested in, meaning when the two years end, how much gain you would have compared to the original amount.

Keep in mind that this number can be positive, and it can be harmful as well.

So you have to use some tools or the formula we have offered to calculate the mentioned amount.

Further, the article will tell you all about the formula you have to use and why you should use CAGR as an investor.

So if you know that is by this point, let’s get to the next section of the article and elaborate even more on the subject, shall we?

## How to use CAGR?

First, you have to know that we will be simple; however, you have to put the variables in the right place for it to work; now, let’s get started and see what this formula is and how you can use it.

When you are investing, you have several variables that you define; the first is the number of years that the investment will be in process, and the second is the final amount or the percentage of the gain you will have.

These are the two parameters that we will be using.

In this formula, you have to take the N root of the annual gain that you will have.

For example, imagine that you want to invest \$1000 for two years with a 50% interest rate at the end, so you have to take the square root of 50%, and the result will be 22.5%.

This rate shows that at the end of the investment, you will have this amount of profit, and this number can be harmful sometimes, meaning that you would lose assets because this formula cannot calculate the risk of the investment.

Now let’s get to the next section and see why you should use the CAGR formula.

## Why is it essential in investment?

Imagine that you are investing a large amount of money, for instance, \$150,000, and you have calculated the risks, and you are sure that you will gain from the investment, so you have to figure the CAGR as well because it would define the amount that you will get.

And knowing about this amount can make a difference in your next move, and you can easily make plans for the future and your following investments, so this is why the CAGR is essential.

Now that you have all the information needed for the CAGR matter let’s get to the end of the article to finish everything.

### In conclusion…

Some of the investors in the world have a team that calculates their interest and their loss or gain this means that these factors are significant for an investor.