When it comes to investing, understanding and calculating stock return is essential for any investor. Stock return represents the percentage gain or loss on an investment over a specific period. It helps gauge how well your stock portfolio is performing and allows you to make informed decisions about whether to hold, sell, or purchase more shares. This article will provide a step-by-step guide on how to calculate stock returns using different methods.

1. Simple Stock Return Calculation

The simple stock return calculation shows the percentage change in the value of a stock from one period to another.

To calculate this, follow these steps:

a. Determine the initial price (P1) and final price (P2) of the stock.

b. Subtract the initial price from the final price.

c. Divide the result by the initial price.

d. Multiply the outcome by 100 to get a percentage.

Simple Stock Return = ((P2 – P1) / P1) x 100%

For example, if you bought a stock at $100 (P1) and sold it for $120 (P2), your simple stock return would be:

Simple Stock Return = (($120 – $100) / $100) x 100% = 20%

2. Total Stock Return Calculation

Total stock return considers both capital gains and dividend income of an investment throughout its holding period.

Follow these steps:

a. Determine the initial price (P1) and final price (P2) of the stock.

b. Calculate capital gain: P2 – P1

c. Determine the total dividends received (D) during the holding period.

d. Add capital gain and dividends: (P2 – P1) + D

e. Divide the result by the initial price (P1).

f. Multiply the outcome by 100 to get a percentage.

Total Stock Return = (((P2 – P1) + D) / P1) x 100%

For example, if you bought a stock at $100 (P1), sold it for $120 (P2), and received $5 in dividends (D):

Total Stock Return = ((($120 – $100) + $5) / $100) x 100% = 25%

3. Annualized Stock Return Calculation

Annualized stock return calculates the average return on an investment per year, allowing for easier comparison between investments with different holding periods. Here’s how:

a. Compute the total stock return using the formula mentioned above.

b. Divide the holding period in days by 365 (or use 252 for trading days).

c. Add one to the total stock return and raise it to the power of (1 / number of years).

d. Subtract one from the result.

e. Multiply the outcome by 100 to get a percentage.

Annualized Stock Return = (((1 + Total Stock Return)^ (1 / Number of Years)) – 1) x 100%

For example, with a total stock return of 25% and a holding period of two years:

Annualized Stock Return = (((1 + 0.25)^ (1 / 2)) – 1) x 100% ≈ 11.8%

Conclusion

Calculating stock return enables investors to evaluate their portfolio’s performance and make informed decisions about their investments. Be sure to understand and apply these calculations accurately, as they serve as critical indicators of your investment strategy’s success.