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. 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 >>
  2. 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 >>
  3. I have discovered that a bond I am interested in has a sinking fund. What does this ...

    First, understand that a sinking fund provision is really just a pool of money set aside by a corporation to help repay a ... Read Answer >>
  4. How do you calculate the percentage gain or loss on an investment?

    To calculate the gain, take the price for which you sold the investment and subtract from it the price that you initially ... Read Answer >>
  5. 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 >>
Related Articles
  1. Trading

    A Beginner's Guide to Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  2. Investing

    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.
  3. Investing

    Calculating The Gain Or Loss On An Investment

    Calculating the percentage of change in an investment is easy. Take the amount the investment gains and divide it by the amount invested.
  4. Managing Wealth

    3 Steps to Assess Your Portfolio's Annual Performance

    Learn about three simple steps you can use to evaluate the annual performance of your investment portfolio, and why rate of return isn't enough.
  5. Financial Advisor

    Retirement Investing with BlackRock's CoRI Funds

    A look at BlackRock’s CoRI Funds as a retirement investment option.
  6. Managing Wealth

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  7. Trading

    Choosing Between Dollar-Cost And Value Averaging

    These are two investing practices that seek to counter our natural inclination toward market timing by canceling out some of the risk.
  8. Investing

    Tips For Controlling Investment Losses

    A profit/loss plan helps investors recognize mistakes and invest logically, rather than emotionally.
RELATED TERMS
  1. Compound

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

    The gain or loss of a security in a particular period. The return ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that ...
  4. Return On Capital Gains

    The return that one gets from an increase in the value of a capital ...
  5. Accounting Rate of Return - ARR

    The amount of profit, or return, that an individual can expect ...
  6. Annual Return

    The return an investment provides over a period of time, expressed ...
Hot Definitions
  1. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  2. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  3. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  4. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  5. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  6. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
Trading Center