When dealing with investments (including stocks), CAGR is how you can describe the average growth of something over a period of time. The acronym stands for Compound Annual Growth Rate.

For instance:

• Let's say that I buy $10,000 worth of stock.
• After one year, it's worth $9,000 (a 10% decrease)
• After two years, it's worth $12,000 (a 33% increase)

If I wanted to brag to my friends, I'd say "I made 33% on my stock from last year!" Anyone who has known me a bit longer would probably be more interested in what kind of return (percentage-wise) I had made in total since I initially purchased the stock (CAGR).

This is calculated as follows:

CAGR = A ^ B - 1

where

      Ending value
A =  -------------- 
     Beginning value

and

           1
B =  --------------
       # of years

so for our example,

A = 12,000 / 10,000 = 1.2
B = 1 / 2 = 0.5

CAGR = 1.2 ^ 0.5 - 1 = 0.0955 (approximately) or 9.55%

You can double-check this by using that value each year and working forward

• Initial stock purchase of $10,000
• Increase of 9.55% ($955) = $10,955
• Increase of 9.55% ($1046) = $12,001

On a side note, it is interesting that the "simple" calculation most people would make for the above example goes like this:

• I have $12,000 now.
• I started with $10,000.
• That is $2,000 profit, which is 20% of $10,000 over 2 years.
• I made 10% profit each year.

Sticking with the CAGR formula prevents such mistakes from happening.