How To Calculate Rate Of Return?

Answer 1

Investing money is an important part of finances. Investing in stocks can net you a significant amount of money. When it comes time to determine how successful an investment was, you want to figure out what the rate of return was. Essentially, the rate of return is the ratio of the money you gained compared with the money you invested. Here is a guide to calculating the rate of return.

The first thing you need to know is the total amount of money you invested. In addition, you want to consider any costs associated with it. For example, let's say you invested $1,000 in a stock. The trade fees associated with that investment totaled $20. Essentially, this means your total cost was $1,020. You always want to factor in the costs. This allows you to get a more accurate rate of return.

To figure out a simple rate of return, you subtract the initial costs from the final value. Then, you divide this number by the initial costs. Let's say you sold the stock for $1,500. You would then subtract the $1,020 from the $1,500. This gives you $480. That is the total amount you gained. To get the rate of return, divide this number by the initial cost. This gives you a rate of return of 47.06%.

In many cases, you will deal with dividends. You may also decide to purchase more stock before selling. Whenever you do this, you want to add the new costs to your initial cost. For example, if you purchase another $1,000 worth of shares, this becomes part of your total cost. Assuming the same $20 transaction, your total cost would now be $2,040. Remember, any amount of money you spend toward the stock should be considered part of the costs.

The best way to figure out your rate of return is to keep a list of any purchases you make. You can do this using a simple spreadsheet. This way, you can easily add up the totals and use that as your base number. You can figure out an actual rate of return once you sell the stock. However, you can figure out an estimated rate of return by factoring in the present value of the stock with how many shares you own. This would give you an approximate selling price.