Stocks: Buying, Selling & Researching

 

Calculating Your Return on Your Investment (ROI)

 

We all want to say at the end of the year "how much money did I make".  But many investors do not look at the total picture. Many investors incorrectly state the difference between the buy and the sell price.


For example:  You purchased $500 worth of stock at $25 which equals 20 shares.  You sold it a year later for $30 a share so you earned $100 as profit. This equals a 20% return on your investment. [$500 (original investment) ÷ $100 (profit) = 20%]

However, what if the stock also pays a yearly dividend of 5%?  Which means you would also receive $1.00 per share.  So if you had those 20 shares for the year, you would also receive $20.  Now your total profit is $120 or a 24% return on your investment [$500 (original investment) ÷ $120 (profit) = 24%.


You need to count your dividends even if you reinvest them Stock Dividends & Dividend Reinvestment Plan (DRIP).  You also need to subtract your broker's commissions and fees. Finally, Uncle Sam needs his share.  So you need to calculate your taxes on your investments.  See an accountant for this.

So the real Return on Your Investment (hopefully it will be a positive number) is calculated as: ROI = profits + dividends – commission/fees – taxes.