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's the smallest number of shares of stock that I can buy?

    The answer to this question is not as straightforward as it seems. Many people would say that the smallest number of shares ... 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. How do you calculate the percentage gain or loss on an investment?

    Calculating the percentage change of your investment is quite easy. All it takes is a little bookkeeping and either a simple ... Read Answer >>
  4. What does it mean when someone says that a stock went up X points? Does this refer ...

    For stocks, one point equals one dollar. So when you hear that a stock has lost or gained X number of "points", this is the ... Read Answer >>
  5. 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 >>
  6. 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. Managing Wealth

    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

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  5. Managing Wealth

    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.
  6. Trading

    Maximizing Your Return in Up or Down Markets

    Learn how to maximize your profit in both up AND down markets by learning how to short sell.
  7. Managing Wealth

    Defining The 3 Types Of Investments

    The first step to being a successful investor is knowing what is and isn't an investment.
  8. Financial Advisor

    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.
  9. Financial Advisor

    How to Know When to Pass on an Investment

    Knowing what to invest in is important, but knowing what not to invest in is equally important. Here's how to decide when to walk away.
  10. Managing Wealth

    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.
RELATED TERMS
  1. Compound

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

    When measuring performance, the actual rate of return of an investment ...
  3. Compounding

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

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

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

    The gain or loss on an investment over a specified period, expressed ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center