What is Average Return on Stocks and Why Does It Matter?
Understanding your return on stock investments is crucial for making informed investment decisions. The average return on stocks measures how much profit or loss you've made on your stock investments as a percentage of your initial investment.
Average return on stocks helps investors evaluate the performance of their investments and compare different investment opportunities. It's a key metric for tracking whether your stock picks are outperforming or underperforming the market.
How to Calculate Average Return on Stocks
Calculating average return on stocks involves comparing the selling price to the purchase price. Here's the formula:
Percentage Return Formula
[
\text{Percentage Return} = \frac{\text{Selling Price} - \text{Purchase Price}}{\text{Purchase Price}} \times 100
]
Absolute Return Formula
[
\text{Absolute Return} = (\text{Selling Price} - \text{Purchase Price}) \times \text{Number of Stocks}
]
Where:
- Purchase Price is the average price per share you paid when buying the stocks
- Selling Price is the average price per share you received when selling the stocks
- Number of Stocks is the total quantity of shares you purchased
Calculation Example
Let's say you invested in a stock with the following details:
- Average Purchase Price: $60 per share
- Average Selling Price: $90 per share
- Number of Stocks: 100 shares
Using the percentage return formula:
[
\text{Percentage Return} = \frac{90 - 60}{60} \times 100 = \frac{30}{60} \times 100 = 50
]
Your percentage return is 50%.
Using the absolute return formula:
[
\text{Absolute Return} = (90 - 60) \times 100 = 30 \times 100 = 3{,}000
]
Your absolute return is $3,000 in profit.
Understanding Your Stock Returns
While calculating returns is straightforward, interpreting them requires context. Here are some important considerations:
- Time Period: A 50% return over 10 years is very different from 50% over 1 year. Always consider the holding period when evaluating returns.
- Risk Level: Higher returns often come with higher risk. Compare returns against similar investments with comparable risk profiles.
- Market Comparison: Compare your returns to relevant benchmarks like the S&P 500 to see if you're outperforming the market.
- Taxes and Fees: Remember that trading fees and capital gains taxes will reduce your actual returns.
Additional Metrics to Consider
Beyond simple return calculations, consider these related metrics:
- Annualized Return: Adjusts your return to show the average annual rate of return over the holding period.
- Total Return: Includes dividends and other distributions in addition to price appreciation.
- Risk-Adjusted Return: Measures return relative to the risk taken, using metrics like the Sharpe ratio.
- Real Return: Adjusts for inflation to show your purchasing power gain.
By regularly tracking your average return on stocks, you can make better decisions about when to buy, sell, or hold your investments, and build a more successful investment strategy over time.