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Do You Know How Much of a Profit You Really Make?

By Edited Oct 31, 2016 0 0

While not losing money on an investment seems like a good plan, making money on an investment is even bet

Uncertainty is an important part of your personal financial planning process
ter.  But how do you know whether your return is a good one, or if you could do better elsewhere?  The definition of a “good return” varies, depending on the purpose and type of the investment.  Figuring out your return is not as simple as one might assume.

 For example, if you begin with a $1000 investment that grows to $2000, your return is $1000, or 100%.  However, if your investment grows to $1500, your return is only 50%. Yet, you cannot compare the above two investments and declare that the first one is better.  This is because you need to keep in mind the length of time you held each investment.  When comparing returns on investments held for different lengths of time, you need to determine the annualized return.   If you purchased stock A for $15 and sold it for $20, your rate of return would differ significantly depending on how long you owned the stock.  If you only owned it for one year, stock A can be considered a winner, returning 33% annually.  However, if stock A sat in your portfolio for five years, its return would be considered a more modest 6%, since the profit is spread out over a five-year period. 

Growth + Dividends

The total return on a stock is the sum of its dividends plus how much you would gain/lose if it were sold. Some stocks may pay high dividends (normally paid on a quarterly basis), but the principal hardly changes. Others may be the opposite. In any event, though, you must look at both the price change and the dividend to determine whether you did well.

Buying a stock is not like purchasing an item in a store: you can’t get your money back if you don’t like its performance.  Therefore, before purchasing a stock (or any financial instrument), research it thoroughly and make sure that what you buy is appropriate. 

It is always important to Know the Facts before making any decision.

 

Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.

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