Horizon Analysis
Categories: Accounting, Metrics, Company Valuation
The moon is rising.
There. That's a horizon analysis. But not as good as The Sun is Also Rising. Fine Hemingway book.
Your investment horizon represents the amount of time you plan to hold an investment. If you need the money two years from now to pay for that planned vacation to Vladivostok, then your investment horizon is two years. If you just graduated college and plan to invest for retirement, your investment horizon might be 40 years.
Horizon analysis takes into account what's likely to happen over the course of an investment horizon. What's going to drive the economy? What will interest rates do? The goal is to maximize returns over that limited investment horizon.
You have a kid who just turned 15 years old. She's going to college in three years. You have a pot of money to invest, but you'll need it in three years to pay for her college. Your investment horizon is three years.
With that in mind, it doesn't make sense to invest in that biotech startup that's five years away from applying for FDA approval. Instead, you use horizon analysis to figure out the best place to put your cash.
Related or Semi-related Video
Finance: What is Electronic Communicatio...12 Views
Finance a la shmoop what is the electronic communication network or ECN?
all right it's the computerized and wired version of this for a small fee [Large computer network]
traders can plug in to a network to trade stocks you know think about it
like Facebook for stock traders only with less political ranting and fewer
photographs of babies and freshly cooked meat generally well generally speaking [A pan of meat and potato's appear]
ECNs are "off-market" that is they aren't really directly part of
an established trading system like the New York Stock Exchange or Nasdaq or one
of the other blessed exchanges they connect market makers directly to third
parties allowing them to trade to their heart's content there aren't a lot of
actual physical hands at work here most of the limit orders are matched
electronically the network charges its fee the transaction is processed and [Company share price appears]
life moves on so think about it like it's 2:00 a.m. on a Saturday and Joe who
likes to trade in his underwear don't ask us why it's just dying to sell a [Joe sits down at PC]
hundred shares of coke to Betty who likes to trade while head-banging to Led
Zep and you know likes to trade with Achmed who's saving money for an air
conditioner yeah well no sweat so this is perfect for anyone who wants to
become active in the trading of stocks but hates any kind of physical human [Man waving to woman and woman walks by]
interaction yeah don't worry the robot rebellion will soon be upon us and ECNs
will rule the roost