Investing in stocks can be a risky business. One can research the market and specific companies, and then make an educated decision on how a stock will perform. But its not an exact science. There are many factors that are hard to predict, such as human emotions, overall market behavior, and global events. As such, a stock can either be a winner or a loser and depending on the outcome, an investor will have to determine the gains or losses in their portfolio.
In order to find the net gain or loss of your stock holding, you will have to determine the difference between what you paid for it and ultimately what you sold it for on a percentage basis. To do so, subtract the purchase price from the current price and divide the difference by the purchase price of the stock.
Dollar Value Profit or Loss
Suppose an investor buys 100 shares of Corys Tequila Company (CTC) at $10/share for a total investment of $1,000. Now, suppose that 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 an investment was required to earn that $700. For example, suppose the investor had also bought 1,000 shares in Robs 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 for a total of $10,700. With this trade, they would have profited by $700, yet it took 10 times the investment compared to CTC to earn it.
Calculating Investment Returns
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 is $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 CTCs return is much higher at 70% compared to 7% for RSD.
The Bottom Line
Calculating your profit or loss on your stock holdings is a fairly straightforward procedure; it is calculating the percentage change between a beginning value and an ending value. When calculating your profit or loss, its imperative to look at the percentage return as opposed to the dollar value.