You have just purchased 100 shares of General Electric Stock

You have just purchased 100 shares of General Electric Stock at $60 per share. You will sell the stock when its market price has doubled. If you expect the stock price to increase 20% per year, how long do you anticipate waiting before selling the stock? [Apply “Rule of 72” to solve this problem]

Solution

This is a question of Time Value of money, we need to find the Number of years for an investment to double. Consider the following formula for computing the future value of price of stock

FV = PV(1+i)^n, where Future value (FV) = $120, Present Value (PV) = $60, Interest rate (i) = 20% = 0.2, we need calculate n (number of years)

so 120 = 60 (1.2)^n, solving this will give us answer n = 3.75 years, So You could wait 3.75 years before selling.