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How to calculate the return of an investment

ITIPress.org – Marlon Jerez / Consulting in Economics and Finance

When realizing an investment, you have the potential of increasing your capital in several ways. If you keep your money in a bank account, you’ll receive interest payments for letting the bank work with your money. The interest is referred to as the return. When talking about an investment in the stock market, the term return is commonly used. Now let’s take a closer look at this return and its components.

If you invest in shares, you are hoping that the shares appreciate in value, nevertheless, they can go down as well. This change in value is part of the return in shares or bonds.

It is interesting and very important to know how to calculate the earnings or losses due to increase or decrease in the price of the share. You can use the following formula:

Current value of the stocks      –     Price paid for the stocks 
                          Price paid for the stocks

Let take the example that you invested $1,000 in shares 1 year ago, buying 100 shares at $10. At the moment, the share price is $11, so your investment is worth 11 times 100 or $1,100. Your return is calculated as follows:

1,100 – 1,000 = 10%

However, shares usually earn dividend payments which are similar to the interest payments banks pay. Dividends are a means of distributing company earnings to share holders.

Let’s continue the above example. Further to the appreciation of the shares from $1,000 to $1,100, assume the company pays $1 per share in dividends. Now you have to calculate the return as follows:

Dividends + Current value of the stocks – Price paid for the stocks
Price paid for the stocks

100 + 1,100 – 1,000  = 20%

If you aggregate dividends, interests and other earnings, you can calculate your total return, which is equivalent to what you really earn or loose when making an investment.

Regretfully, capital earnings, dividends and interest payments are subject to taxation. For that reason, it is imperative to subtract the taxes from your return.

According to financial analysts, many investors, generally novice ones, usually forget to take into account taxes when calculating their investments. This can actually have a big impact on the return and can sometimes lead to favor more tax deductible ways of investments.

As a general advice, it is important to remember that the return has various components, which are capital gains, dividends and interests. But, last but not least, take into account taxes which can have a negative impact on your return, just like commissions and/or other fees.

Write to Marlon@TheInvestor.tv or Info@TheInvestor.tv for more information

“In the short run the market is a voting machine, but in the long run, it is a weighing machine.” - Benjamin Graham




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