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Break-even time is the amount of time it takes to recoup the amount spent in securing an asset and begin to actually realize some sort of profit from the venture. Understanding how long this type of activity will take is very important when considering the purchase of different types of stocks, bonds, real estate, or other types of financial assets. By accurately projecting the break-even time associated with the acquisition of the asset, it is possible for investors to decide if a given deal is really worth the time and effort, or if their interests are better served by considering a different investment vehicle.
One of the easiest ways to understand what is meant by a break-even time is to consider a situation in which an investor must spent $5,000 US dollars (USD) to purchase an even lot of a given stock. Before making the purchase, the investor will look at the past and present performance of the stock to determine when and how much the unit price increases over time. Taking into account all factors that are likely to influence the movement of that stock price in the future, the investor can predict when that initial investment is recouped in terms of the increase in value of those shares, or the dividends that are paid periodically by the issuer of the shares. Assuming that break-even time is considered acceptable by the investor, acquiring the shares will make sense.
In order to accurately project the break-even time associated with any investment, there are several factors to consider. One has to do with what must actually be paid to acquire the investment. This means that along with the purchase price, the investor will also want to account for any brokerage fees or charges that are incurred during the acquisition. In some instances, the investor will also want to allow for taxes that are assessed on the returns generated by the asset.
Understanding market conditions and how they can affect the value of the acquired investments is also important to projecting the break-even time. While investors can often allow for events that are highly likely to occur, there is also the chance of unforeseen events to undermine the original projection, making it necessary to recalculate the date. For example, an unexpected natural disaster may cause the investment to lose money for a time before it begins to recover. Even events like the loss of a key figure in the issuing company’s leadership, unanticipated shifts in political policies or regulations, or the invention of some new product that renders the issuer’s product line obsolete can lead to the need to amend the break-even date from time to time. For this reason, arriving at a break-even date is not necessarily a one-time event, but something that must be revisited from time to time as circumstances either increase the returns earned or cause them to fall behind the original projections.