By Tory Vance
Calculating returns on your investment is one of the most critical tasks for you as an investor. Though calculating absolute returns is simple, calculating percentage gain or loss might get a bit tricky.
For understanding how to calculate percentage gains or losses, knowing the following terminologies is essential:
- Purchase cost – It is the total price paid to acquire the investment
- Sale consideration/Current market value – It is the sale consideration received by selling the investment or the current market value of the investments if not sold
Once you have these variables, finding gain or loss per cent on an investment is just simple mathematics:
Percentage (%) gain or loss = [(Sale Consideration – Purchase Cost) ÷ Purchase Cost] * 100
If the sale consideration is less than the purchase cost, the resultant answer would be a negative return, which means a loss on investment. If the sale consideration is greater than the purchase cost, it results in a gain on investment.
Let us understand the formula with the help of an example:
Suppose you bought a stock of ABC Ltd. at Rs. 1,200, which is the purchase cost. After a year, you sell this stock at Rs. 1,500, which is the sale consideration. Your gain from selling the stock will be the sale consideration minus the purchase cost, i.e., Rs. 1,500 – Rs. 1,200 = Rs. 300
Percentage (%) gain or loss = [(1500 – 1200)] ÷ 1200 × 100
= 25%
Why should you as an investor know this formula?
Calculating percentage gains or losses standardises returns and simplifies the comparison between various investments/investors. For example, two investors earned Rs. 1,000 from investing in stocks. However, one investor spent Rs. 4,000 while the other spent Rs. 5,000 on purchasing the stock. Even though both earned equal amounts from the investment, the first investor was better off as they earned a higher rate of returns compared to the returns earned by the second investor.
Investments may also have different holding periods. Annualised percentage gains or losses make them comparable even in this scenario. For example, an investment generating 25% return per annum is equivalent to a 12.5% return for six months. The annualised gain, in this case, is calculated as 12.5% ÷ 6 months × 12 months which equals 25% return p.a.
Treatment of some costs and incomes in computing returns
The example we considered was based only on the purchase price and sale consideration of the asset. However, in practical scenarios, there are other costs and incomes that affect the investments’ returns. These costs include brokerage charges, taxes, and other charges, while incomes include dividends and other cash payouts received for holding the investment. The costs or incomes should be respectively subtracted from or added to the net gains from the investments.
One of the most critical aspects of financial management is to allocate capital efficiently to maximise such risk-adjusted returns on investments. There are various wealth management firms and financial advisors that provide tailor-made financial services best suited for their clients. Informed decisions through financial advice enable you to generate long-term wealth and achieve your long-term dreams and targets through different investment avenues like stocks and mutual funds.
Reach out to one today to explore plans that are in line with your goals, risk appetite and investment horizon!
