A:

This may seem like a fairly simple question, but it can be confusing if you fail to break it down into the proper steps. Stock trades generate dollar profits and/or losses, which are measured in percentages. Let's use a simple example to illustrate:

Suppose an investor buys 100 shares of Cory's Tequila Company (CTC) at $10/share for a total investment is $1,000. Now suppose two months later the investor sells the 100 CTC shares for $17/share. They receive $1,700, and their profit for the trade is $700.

A profit of $700, however, means very little to an investor, unless they know how large of an investment was required to earn that $700. For example, suppose the investor had also bought 1,000 shares in Rob's Sake Distillers (RSD) at $10 apiece (for a total investment of $10,000), and later sold the 1,000 shares at $10.70 each per share, or for a total $10,700. With this trade, they would have profited by $700, yet it took ten times the investment compared to CTC to earn it.

To avoid this sort of profit ambiguity, investment returns are expressed in percentages. The CTC investment was made at $10/share and sold at $17/share. The per share gain is $7 ($17 - $10). Thus, your percentage return on your $10/share investment is 70% ($7 gain / $10 cost). This 70% return would be the same if they had invested in 100 shares or 100,000 shares, provided all the shares were bought at $10 and then sold at $17. By multiplying the percentage return on the investment (70%) by the total dollar amount invested, investors will know how much in dollar terms they have made on this investment (70% return on $1,000 in $1,700 providing a dollar gain of $700).

Using this method, your RSD investment would have yielded only a 7% return ($0.70 gain / $10 cost). So, even though your RSD gain of $700 (7% x $10,000) is equal to your CTC gain, clearly CTC's return is much higher at 70% compared to 7% for RSD.

(Now that you understand how to measure stock investment profits and losses, learn how setting pre-determined limits on your profits and losses can improve your investment performance by reading

The Importance Of A Profit/Loss Plan.)

RELATED FAQS
  1. If one of your stocks splits, doesn't that make it a better investment? If one of ...

    Unfortunately, no. To understand why this is the case, let's review the mechanics of a stock split.Basically, companies choose ... Read Answer >>
  2. Do I receive the posted dividend yield every quarter?

    First things first: a company with common stock that pays a dividend will typically distribute the dividend every quarter. ... Read Answer >>
  3. How do I calculate the percentage gain or loss for my portfolio when all of the stocks ...

    Finding the total percentage gain or loss on a portfolio requires a few simple calculations. First, you should understand ... Read Answer >>
  4. What is the difference between economic value added and market value added?

    Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true ... Read Answer >>
  5. What is the difference between capital gains and investment income?

    Learn about the difference between capital gains and other types of investment income, such as dividends paid on stock or ... Read Answer >>
  6. I have only $500 to invest, am I limited to buying only penny stocks?

    No, you are not required to invest only in penny stocks - investors are generally not restricted to a certain kind of stock ... Read Answer >>
Related Articles
  1. Investing Basics

    Investing $100 a Month in Stocks for 20 Years

    Learn how a monthly investment of just $100 can help build a future nest egg using properly diversified stocks or stock mutual funds.
  2. Term

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  3. Options & Futures

    Margin Trading: The Advantages

    Why use margin? It's all about leverage. Just as companies borrow money to invest in projects, investors can borrow money and leverage the cash they invest. Leverage amplifies every point ...
  4. Investing Basics

    Defining The 3 Types Of Investments

    The first step to being a successful investor is knowing what is and isn't an investment.
  5. Investing

    The Art Of Selling A Losing Position

    Knowing whether to sell or to hold is tough. And no rule fits all. Find out what to consider.
  6. Investing Basics

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  7. Bonds & Fixed Income

    6 Things You Think You Understand About Investing - But Really Don't

    Not understanding these investing points could leave you with an empty wallet.
  8. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  9. Retirement

    Retirement Planning For 20-Somethings: Choosing And Managing Your Investments

    The types of assets in which your savings are invested will significantly impact your return on investments and, consequently, the amount available to finance your retirement. As a result, a ...
  10. Active Trading

    4 Steps To Creating A Better Investment Strategy

    Make your trading safer and more streamlined by following these simple guidelines.
RELATED TERMS
  1. Compound

    The ability of an asset to generate earnings, which are then ...
  2. Compounding

    The ability of an asset to generate earnings, which are then ...
  3. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  4. Return

    The gain or loss of a security in a particular period. The return ...
  5. Rate Of Return

    The gain or loss on an investment over a specified period, expressed ...
  6. Target Return

    A pricing model that prices a business based on what an investor ...
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center