Determine Return on Investments explained by professional forex trading experts the “ForexSQ” FX trading team.
Determine Return on Investments
Have you calculated the return on your stock or portfolio lately, and more importantly, have you calculated its return in a meaningful way?
There are several calculations that will give you an idea of how an investment is doing. Some are more complicated than others are, but none are beyond the reach of the average investor who has a calculator. Here are several calculations you can use to help you understand how your investments are doing.
This is a simple calculation, but it reminds us that we need to include dividends (where appropriate) when figuring the return of a stock. Here is the formula:
(Value of investment at the end of the year — Value of investment at beginning of the year) + Dividends / Value of investment at beginning of the year = Total Return
For example, if you bought a stock for $7,543 and it is now worth $8,876, you have an unrealized gain of $1,333. You also received dividends during this time of $350. What is the total return?
($8,876 – $7,543) + $350 / $7,543 = Total Return
$1,333 + $350 / $7,543 = Total Return
$1,683 / $7,543 = Total Return
0.2231 or 22.31% = Total Return
You can use this calculation for any time period which is a weakness since it doesn’t take into account the value of money over time.
Simple return is similar to total return, however, it is used to calculate your return on an investment after you have sold it.
Here is the formula:
Net Proceeds + Dividends / Cost Basis – 1
Here’s an example: Suppose you bought a stock for $3,000 and paid a $12 commission. Your cost basis is $3,012. You sell the stock for $4,000 and there is another $12 commission, so your net proceeds are $3,988. Dividends amounted to $126.
$3,988 + $126 / $3,012 – 1 = Simple Return
$4,114 / $3,012 – 1 = Simple Return
1.36 – 1 = Simple Return
0.36 or 36% = Simple Return
Like the Total Return calculation, the Simple Return tells you nothing about how long the investment was held. If you want to see after-tax returns, simply substitute “net proceeds after taxes” for the first variable and use an after-tax dividend number.
Compound Annual Growth Rate
For investment held more than one year, you may want to look at this more sophisticated, yet not much more complicated calculation.
The Compound Annual Growth Rate shows you the value of money in your investment over time. A 40 percent return over two years is great, but a 40 percent return over ten years leaves much to be desired. Think of this calculation as the growth rate that takes you from the initial investment value to the ending investment value, presuming that the investment has been compounding over the time period.
To calculate the compound annual growth rate, divide the value of an investment at the end of the period you’re looking at by its value at the beginning of that period. Take that result and raise it to the power of one divided by the period length, and then subtract one from that result.
Determine Return on Investments Conclusion
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