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. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the 'Rule of 72'?

    The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >>
  3. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Will Health Care Continue to Drive IPOs in 2016?

    Learn why health care IPOs may be slowing in 2016, and how Obamacare, poor previous filings and economic factors are affecting the health care sector.
  2. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  3. Investing Basics

    How liquid are Fidelity mutual funds?

    Review the liquidity features of mutual fund shares and an overview of Fidelity mutual funds. Most investors look for convenient access to their investments.
  4. Sectors

    3 Cyclical Industries To Exploit in 2016

    Learn about the three industries at the down end of their business cycles, and discover how these industries may improve in years to come.
  5. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  6. Stock Analysis

    If You Had Invested Right After Berkshire Hathaway's IPO (BRK.A)

    Learn how much you would now have if you had invested right after Berkshire Hathaway's IPO, and find out the classes of shares that you could invest in.
  7. Stock Analysis

    Is Now the Right Time to Buy Coty? (COTY)

    Find out whether fragrance and color cosmetics powerhouse Coty deserves a place in your portfolio. Will recent acquisitions help turn the company around?
  8. Term

    Understanding Market Price and Its Changes

    An asset’s or service’s market price is the current price at which it can be bought and sold.
  9. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  10. Professionals

    Is A Stockbroker Career For You?

    Becoming a stockbroker requires a broad skill set and the willingness to put in long hours. But the rewards can be enormous.
RELATED TERMS
  1. Value Investing

    The strategy of selecting stocks that trade for less than their ...
  2. Sector

    1. An area of the economy in which businesses share the same ...
  3. Swap

    A derivative contract through which two parties exchange financial ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The ...
  5. Issued Shares

    The number of authorized shares that is sold to and held by the ...
  6. Depository Trust Company - DTC

    One of the world's largest securities depositories, it holds ...
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center