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%
1,000
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%
1,000
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 |