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How to calculate stock returns



How to calculate stock returns?

Level 1: calculating stock returns based on share price increase or decrease only. I bought some shares in telecom company Verizon 5 years ago at $45 per share, which are currently trading for $60 per share. The return I made on just the increase of the share price is the difference between the current share price and the share price at the time of purchase in the numerator, divided by the share price at the time of purchase in the denominator. $60.04 minus $45.23, divided by $45.23. This equates to $14.81 divided by $45.23, which is a 33% share price gain in 5 years. If you translate that to annual returns in a very simple way (by dividing the 33% by 5), you get to around 6.5% return per year.

⏱️TIMESTAMPS⏱️
0:00 Share price gains
1:15 Share price gains plus dividends
2:40 Share price gains plus dividends reinvested
5:56 Share price gains + DRIP – cost/fees

This works OK and is actually the final answer for stocks that do not pay a dividend, but this stock return calculation does not provide a full picture in case the company does pay a dividend (like Verizon).

In level 2 we calculate the #stockreturns based on both the #shareprice increase or decrease, as well as dividends received. The advantage is that this allows the performance of shares to be compared even though some of the shares may have a high growth and low dividends and others may have low growth and high dividends.

The updated formula for calculating the stock return is the share price change plus the dividends in the numerator, divided by the share price at the time of purchase in the denominator. $14.81 plus $11.86, divided by $45.23. This is $26.67 divided by $45.23, or 59% total gain in 5 years. Once again dividing this total return by 5, this equates to around 12% per year. A much more complete picture of stock returns versus just focusing on the annual 6.5% share price gain!

We can further improve the accuracy of our calculation, by looking at the share price gain, and dividends reinvested. This requires either a more extended spreadsheet, or the use of an online tool. If you type “total return on a stock including reinvestment calculator” into a search engine, you will get to a screen like this where you can input the ticker symbol (in our case VZ for Verizon), the starting amount (in our case 1 share bought at $45.23), and the starting and ending dates of the period for which you want to calculate total shareholder returns. By the way, DRIP stands for dividend reinvestment plan: the investor’s dividends are directly reinvested in the underlying equity, generating additional returns. The output from the online tool is a graph like this, plus a number here at the bottom left stating what the value of the share price plus reinvested dividends is at the end of the time period. Our updated formula for the stock return calculation is final value minus starting value, divided by starting value. $76.92 minus $45.23, divided by $45.23. This is $31.69 divided by $45.23, or 70% gain in 5 years. Dividing this on a “straight-line” basis, this equates to 14% return per year.

So far, the return went up for every additional level that I covered: from 33% in 5 years based on share price appreciation, to 59% in 5 years based on share price change plus dividends, to 70% based on share price change plus reinvested dividends. What will happen in level 4? Does it get any better than this? No, it doesn’t, as in level 4 we take transaction cost and service fees into account, which lower the total returns. You incurred transaction cost when you bought the shares, and if you want to calculate your total returns, should also take into account transaction cost if you sell the shares at the end of the 5 year period. On top of that, during the 5 years that you were holding the shares, your bank or broker has probably charged you a service fee as a percentage of the value of your portfolio. These transaction costs and service fees depends on the broker and plan you are on, so I am not inserting any actual numbers into the calculation here, but I guess you get the point!

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

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20 Bình luận

  1. The Finance Storyteller

    Enjoyed this video? Then subscribe to the channel right now, and watch my video on how to build an investment portfolio next: https://www.youtube.com/watch?v=K4mWd2zBYVk

  2. Jacob D.

    Great video!

  3. LEMD49

    Then level 5 to calculate your real term returns (accounting for your cost of capital in each period)

  4. Omar Jawhar

    For ones who are confused with simple things like I do,
    DO NOT multiply the dividends by the number of shares you own then plug it to the equation.
    that is not how it's calculated. the dividend in the quation is for ONE share!

  5. Alex

    My God man what a good job

  6. Mariah Ledbetter

    Hello, I am wondering how did you get $11.86 when you added in level 2 of share price + dividends. Please forgive me I am currently studying finance and I am still new to everything. Thank you.

  7. chandan nasta

    Let me know if I am correct since my maths is weak. So if share stock price 10 years back was 11 Rs and today is 452. so it would be 452-11/11= 40.09%. Am I correct yes or no?

  8. Sam Sam

    Can you do a video on how to work out break even in money terms.

    Eg if I bought shares at 100 £1000 worth and it drops to 50 how much money would I need to break even?

    If im down 30% how much would I need to add to break even just with money?

  9. Josh Higginson

    If I brought $800 worth of shares at 0.0004694 and sold them at 0.001152 how much money did I make ? Having a real blond moment here. How do I work this out ? 🤦‍♂️

  10. Roshan kumar Rauniyar

    You didn't account for inflation

  11. erez levi

    Hello Dear Philip.
    how are you ?
    long time no see haha

    I have a slightly opposite question from all the examples you gave here in the video ..

    Suppose I want to buy a million dollars worth of Apple stock to stay there for the long term of many years but I would like to withdraw every month a small percentage so that I can make a living, how much will it hurt my returns?

  12. Jae Hus

    Thank you – your videos are amazing 😊

  13. Devan Cierra

    Very helpful! Thank you

  14. Нитеш

    How to calculate Captial weighted Sector returns?

  15. austinn hernandezz

    Great video as always Mr. FST

  16. T

    Do you trust the financial statement data provided in databases like Bloomberg, Capital IQ, etc.? Sometimes I find some of the adjustments they make I don't necessarily agree with.

  17. JAGADEESH SAKURU

    Life is beautiful with your videos.

  18. Effortless

    FIFO gang

  19. Deep Data Investing

    Good morning! ☀️ Excited about this video 😊

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