Calculating Stock Returns
Stock returns come from two sources: capital gains (price appreciation) and dividends. Total return is the sum of both, minus fees and commissions. Calculating returns accurately helps evaluate investment performance and make informed decisions about buying, selling, or holding positions. Always include dividends - they can represent 30-50% of total return for dividend-paying stocks.
Return on investment (ROI) percentage shows your gain relative to the amount invested. A stock bought at $50 and sold at $75 with $5 in dividends per share yields 60% ROI on a $5,000 investment (100 shares). However, ROI doesn't account for time - 60% over 1 year is much better than 60% over 5 years. Annualized returns adjust for time, providing better comparison across investments.
Don't forget to account for taxes. Long-term capital gains (held over 1 year) are taxed at 0%, 15%, or 20% depending on income. Short-term gains are taxed as ordinary income. Qualified dividends get preferential rates, while ordinary dividends are taxed as income. Also consider fees - even small commissions and expense ratios compound over time, significantly reducing returns.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
The S&P 500 averages about 10% annually including dividends. Beating the market consistently is difficult - most active investors underperform index funds long-term. Anything above 10-12% over many years is excellent.
Yes, if you don't need the income. Dividend reinvestment compounds growth significantly over time. Many brokers offer automatic dividend reinvestment plans (DRIPs) with no fees, buying fractional shares.
Use the formula: (Ending Value / Beginning Value)^(1/Years) - 1. For example, doubling your money in 5 years is (2)^(1/5) - 1 = 14.87% annualized return.
Price return only considers stock price change. Total return includes both price change and dividends. Always use total return to evaluate true performance - price return alone is misleading.
Taxes can reduce returns by 15-37% depending on holding period and income level. Long-term holdings (over 1 year) get preferential capital gains rates. Tax-advantaged accounts (IRAs, 401ks) eliminate tax drag on gains.