When you invest money in stocks, you need to know one or more return formulas, such as the one for calculating the total return on investment.
Generally, when calculating the total return on a stock, you need to take into account all of the costs and all of the proceeds of your investment. These include dividends and stock price appreciation. And it is expressed in the form of a percentage relative to the original amount you invested.
Knowing the total return formula helps you make better evaluations of the performance of your stock purchases and sales. You will have a much better idea of how well or badly your investment is doing.
Costs and Commissions
When thinking about the cost of investments, most people think of the purchase price of the stock. However, most stock purchases require an additional cost to acquire or dispose of called commissions.
Commissions refer to costs that investment managers or brokers charge investors for providing financial advice or brokerage services during buying and selling of stocks. The commissions that you pay lower your total return on the stock because it eats into your profits.
You can calculate the cost of purchasing a stock by multiplying the stock price by the shares bought. For example, if you purchase 100 shares at $49 per share, the total cost equals $4,900.
Don't Forget Dividends
For growth stocks that pay few dividends, the total return will not be affected if you forget to include dividends. However, many more mature companies pay significant dividends that radically change the total return on the stock.
If an investment pays cash dividends, add the amount to the total return. If it pays stock dividends, add the value of the stock when you sell it.
For example, if you receive an extra five shares of the stock and you sell them for $50 each, your total return is increased by $250 from dividends.
Total Return Formula
To figure your total return, add total proceeds from your selling price for the investment to the dividends received to find your total proceeds. Next, add the commissions paid to the cost of buying the investment to find your total costs. Finally, subtract the total costs from the total proceeds to find the total return.
For example, if you sell your stock for $5,000 and received $250 of dividends, your total proceeds equal $5,250. If you paid $25 to buy the stock, $25 to sell the stock and $4,900 to buy, then find your total costs equal $4,950. Finally, subtract $4,950 from $5,250 to find your total return equals $300.
Read More: How to Calculate Daily Stock Return
Using Percentages Instead
Instead of using a raw number, many investors use percentages to measure their rate of return because it gives a context for the measurement.
After all, when calculating total return on a stock, you are comparing it to what you spend to acquire that stock. And that original investment amount is what provides you the basis for making comparisons.
Therefore, to figure your total return percentage, divide the total return by the amount invested and multiply the result by 100 percent. For example, if you have a $300 gain and a $4,900 initial investment, divide $300 by $4,900 to get 0.0612 and multiply by 100 to get a total return of 6.12 percent.
Read More: How to Find Rate of Return
The Summarized Total Return Formula
You can express the total return formula in various ways. But one simple way to express it is as follows:
Total Return = ((Final Investment Value-Original Investment Value) + Distributions from the investments)/Original Investment value*100%.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."