How to Calculate Rate of Return on a Stock

Stock Rate of Return Calculator

How to Calculate Rate of Return on a Stock

Calculating the rate of return on a stock is essential for investors to understand the true performance of their portfolio. Unlike a simple savings account, stock returns are composed of two primary components: capital appreciation (price increase) and income generation (dividends).

The Components of Stock Return

To accurately assess how well a stock has performed, you must look beyond just the current share price. The calculation involves:

• Capital Gains: The difference between your selling price (or current market price) and your original purchase price.
• Dividends: Cash payments made by the company to shareholders during the holding period.
• Transaction Costs: Brokerage fees, commissions, or trading fees that reduce your overall profit.

The Rate of Return Formula

The basic formula for calculating the Return on Investment (ROI) for a stock holding is:

ROI = [(Current Value + Dividends – Commissions) – Initial Cost] / Initial Cost × 100

Where:

• Initial Cost = (Purchase Price × Number of Shares) + Buying Commissions
• Current Value = Selling Price × Number of Shares

Example Calculation

Imagine you purchased 100 shares of a technology company at $50 per share. You paid a $10 commission fee. After holding the stock for two years, you sold the shares at $75 each. During that time, you received $200 in total dividends.

1. Calculate Total Cost: ($50 × 100) + $10 = $5,010
2. Calculate Total Revenue: ($75 × 100) + $200 = $7,700
3. Net Profit: $7,700 – $5,010 = $2,690
4. ROI: ($2,690 / $5,010) × 100 = 53.69%

Annualized Return (CAGR)

If you have held a stock for more than one year, the simple ROI might look deceptively high. To understand the yearly performance, investors use the Compound Annual Growth Rate (CAGR). This smooths out the return over the holding period to show what the annual yield would have been.