How to Calculate Share Returns Easily

Calculating share returns is an essential skill for investors who want to assess the performance of their investments. In this article, we will explore the different ways to calculate share returns and provide some useful tips to help you improve your investment strategy.

What are share returns?

Share returns refer to the profits or losses that an investor makes from investing in a particular stock. Share returns are usually expressed as a percentage and are calculated based on the change in the stock's price over a specific period.

How to calculate share returns?

There are two main ways to calculate share returns: theabsolute return methodand the time-weighted return method.

The absolute return method calculates the actual profit or loss that an investor makes from investing in a particular stock. To calculate the absolute return, you need to subtract the initial purchase price from the final selling price and divide the result by the initial purchase price. The formula for the absolute return is:

Absolute return = (Final selling price - Initial purchase price) / Initial purchase price

For example, if you bought a stock for $100 and sold it for $120, the absolute return would be:

Absolute return = ($120 - $100) / $100 = 0.2 or 20%

The time-weighted return method, on the other hand, is a more accurate way to calculate share returns, especially for long-term investments. The time-weighted return method takes into account the impact of cash flows on the investment returns. To calculate the time-weighted return, you need to divide the investment period into sub-periods and calculate the return for each sub-period. The formula for the time-weighted return is:

Time-weighted return = [(1 + R1) x (1 + R2) x ... x (1 + Rn)] - 1

Where R1, R2, ..., Rn are the returns for each sub-period.

For example, if you invested $10,000 in a stock for one year and received a dividend of $500 at the end of the year, and the stock price increased from $100 to $110 during the year, the time-weighted return would be:

Time-weighted return = [(1 + 0.1) x (1 + 0.05)] - 1 = 0.155 or 15.5%

Tips for improving your investment strategy

Calculating share returns is only the first step in assessing the performance of your investments. Here are some tips to help you improve your investment strategy:

1. Diversify your portfolio: Investing in a diversified portfolio of stocks can help reduce the risk of losses and increase the potential for returns.

2. Invest for the long-term: Long-term investments tend to generate higher returns than short-term investments, as they allow more time for the power of compounding to work.

3. Research the company: Before investing in a particular stock, research the company's financials, management, and competitive landscape to ensure that it has strong growth potential.

4. Be patient: Investing is a long-term game, and it takes time for investments to generate returns. Avoid making impulsive decisions based on short-term market fluctuations.

Conclusion

Calculating share returns is an essential skill for investors who want to assess the performance of their investments. By using the absolute return method or the time-weighted return method and following some simple tips to improve your investment strategy, you can maximize your returns and minimize your risk.