Answer:
The calculation for ROC is simple in that it takes the current value of a stock or index and divides it by the value from an earlier period. Subtract one and multiply the resulting number by 100 to give it a percentage representation.
Explanation:
Rate of change is an extremely important financial concept because it allows investors to spot security momentum and other trends. For example, security with high momentum, or one that has a positive ROC, normally outperforms the market in the short term. Conversely, a security that has a ROC that falls below its moving average, or one that has a low or negative ROC is likely to decline in value and can be seen as a sell signal to investors.
The rate of change is also a good indicator of market bubbles. Even though momentum is good and traders look for securities with a positive ROC, if a broad-market ETF, index, or mutual fund has a sharp increase in its ROC in the short term, it may be a sign that the market is unsustainable. If the ROC of an index or other broad-market security is over 50%, investors should be wary of a bubble.
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