Formulas Used in the Stock Market to Calculate the Profit of a Trade

Formulas Used in the Stock Market to Calculate the Profit of a Trade
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When you trade, the fast action can sometimes make it difficult to keep track of how much money you are making and your actual profits per trade. Combine the action with leverage, commissions and different price differential jargon, and the profit picture gets pretty fogged up. Take the values of your trading back to the basics and apply some simple math to determine how much you actually made on each of your trades.

Raw Dollar Profits

For each completed trade, you need to determine the number in dollars that you gained or lost. You need to include commissions in the calculation. For example, you bought a stock option for $250 and sold it a few days later for $500. Your broker charged a $7 commission for each end of the trade, so your profit was $250 minus $14, or $234. Calculating profit on a security bought and then sold is easy math. If you sell short stocks or other securities, you still need to determine the difference between the selling price and the buy-it-back price.

Messing With Ticks and Pips

If you trade stocks or options, it is pretty easy to find the difference between your buy and sell prices. With futures and foreign currency exchange, or Forex, things get a little more complicated. With a futures contract, the minimum value change is called a "tick," and the tick size varies among different types of futures. One tick may be $5 or $12.50 or another value. You need to know the tick value of the futures you trade. Forex measures incremental price changes in "pips," which could range from a dollar or less to somewhere around $10. Pips are not always a nice round number, but your trading software will tell the pip value for the size of your trade. To get your profit per trade, multiply the ticks or pips you gained by the appropriate value and subtract any commissions or fees.

Capital Employed

After you calculate how much you made on a trade, you need to determine how much of your trading capital was tied up while the trade was on. For example, if you buy 100 shares of a $50 stock, you put $5,000 of capital to work. If you bought the shares on 50 percent margin, you only used $2,500 to make the trade. With options, you use capital to buy contracts or to cover the margin requirement of sold contracts. Futures and Forex have fixed margin deposit requirements based on the size of your trade. The value in your trading account that's sequestered by the margin would be your invested capital.

Converting to Percentages

With the dollar amount you made from a trade and the amount of capital you needed to make the trade, a simple division calculation gives you a raw percentage return. If you bought 100 shares of a $50 stock for cash and made $1 per share after commissions, your $100 profit on $5,000 of capital produces a 2 percent profit. Not a bad return if you are day trading, but not so good if you held the stock for six months. Keeping a record or log of your trades that includes prices and times will help you see which trades were the most profitable.