How to Calculate Return on Investment
In order to determine the performance of your portfolio you should make regular calculations on its return. Many investors fail to make appropriate estimations. This article aims to provide you with guidelines on how to calculate the returns on your investment.
In order to estimate the performance of your stocks, you can use several methods. You may find some of them very difficult, but with a little concentration and a calculator nothing will hinder your evaluation of how your investment is doing.
The calculations are as follows:
 Total Return
Total Return represents one of the easiest estimations, which also includes dividends as part of our considerations. The formula for calculating total return is:
Total Return = [(EndoftheYear Investment Value  BeginningoftheYear Investment Value) + Dividends] / BeginningoftheYear Investment Value
Example: John purchased a stock for $6,000. At the end of the year the stock is worth $7,500. Therefore, John has an unrealized gain of $1,500. John was paid dividends of $260. So, John's total return is calculated as follows:
Total Return = [($7,500  $6,000) +$260] / $6,000 = 0.293
Therefore, the stock of John has a total return of 29.3%.
One of the drawbacks of total return is that it doesn't take into consideration the change in the value of money over the time.

Simple Return
Simple return calculations are executed after you have sold the investment. The formula you use to calculate it is:
Simple Return = (Net Proceeds + Dividends) / Cost Basis  1
Example: John purchased a stock for $2,000. He paid a commission fee to his broker amounting to $15. Therefore, the cost basis of John is $2,015 ($2,000 + $15). John sold the stock for $3,000. Again he paid his broker a commission of $15. Therefore, his net proceeds are $2,985 ($3,000  $15). He was also paid dividends amounting to $100. Therefore, the simple return of the investment is:
Simple Return = ($2,985 + $100)/$2,015  1 = 0.53
Thus, the simple return of John's investment is 53%.
Simple return doesn't give you an idea on the time period during which the investment was held. In order to get aftertax returns, net proceeds should be substituted by net proceeds after taxes and dividends should be substituted by after tax dividends.

Compound Annual Growth Rate
In order to make evaluation on the return of an investment that is held for more than a year, you can use the compound annual growth rate ratio. It takes into consideration the time value of money.
Compound Annual Growth Rate = Adjusted Simple Return ^{(raised to the power)}  1
Adjusted Simple Return = (Net Proceeds + Dividends) / Cost Basis
Power (Exponent) = 1 / number of years the investment has been held
Example: Continuing from the previous example for the calculation of simple return we now take into account that John has held the stock for 5 years.
Compound Annual Growth Rate = 1.53 ^{(1/5)}  1 = 1.53 ^{(0.2)}  1 = 0.089
Thus, the compound annual growth rate of John's investment is 8.9%.
Calculating compound annual growth rate is more complicated than calculating the previous ratios, but you can find the calculations in many online sources.
Rate this article : Low  High 
 Pick the Best Stock Type for You
 Cyclical vs NonCyclical Stocks
 Dividend Yield Calculation and Drawbacks
 Book Value Explanation
 Dividend Payout Ratio Calculation
 Dividend Yield Explanation
 Stock Beta Value
 Operating Cash Flow Implications
 Stock Valuations  Key Interest Rates Relationship
 Price to Book Ratio Calculation
 Return on Equity Calculation and Drawbacks
 How to Benefit from Short Sellers
 Earnings per Share EPS Calculation
 PEG Ratio Calculation
 Simple Return vs Compound Annual Growth Rate Formula
 Price to Cash Flow Ratio vs Free Cash Flow
 Institutional Investors and Their Influence on Stock Trading
 Company Valuation Methods  Debt Evaluating
 Company Valuation Methods  Management Effectiveness Ratios
 Company Valuation Methods  Debt Evaluation Formulas
 Determining the Right Stock Price
 The Importance of Earnings in Evaluating Stocks
 Price to Sales Ratio Calculation
 Price to Earnings Ratio Calculation
 Cash Flow Valuation
 Relative Strength Indicator
 NonFinancial Characteristics of a Successful Stock
 PerShare Price vs Market Cap
 Value Stocks vs Growth Stocks
 Identifying a Value Stock
 Small Cap Stocks Opportunities and Risks
 Stock Analyst Recommendations  Should We Trust Them?
 Value  Growth Stocks Comparison
 Investing in Hedge Funds: Pros and Cons
 Price to Sales Ratio (PSR) Explanation
 Funds of Hedge Funds
 Investing in Interval Funds
 How to Select a Winning Stock from a 52Week List
 Earnings Estimates and Stock Selection