Emily RobertsAny investor needs to be able to calculate the gain or loss percentage on an investment. It enables you to calculate how much you have made or lost in relation to your initial investment, which gives you crucial knowledge for making wise investment choices.
In this piece, we’ll go through the formula for determining an investment’s percentage gain or loss as well as its significance. Additionally, we’ll demonstrate how to factor in extra factors like commissions and dividends as well as how to compute the percentage gain or loss for stocks and indexes.
In a Nutshell
- Subtract the purchase price from the sale price, divide it by the purchase price, then multiply the result by 100 to determine the percentage gain or loss.
- Investors can calculate their percentage gain or loss to see how much they have made or lost in relation to their initial investment.
- Stocks and indexes are just two examples of the various investment kinds for which the percentage gain or loss calculation can be applied.
- Subtract the investment costs from the profit in order to account for transaction charges like commissions and fees.
Jackson MitchellCalculation of Gain or Loss Percentage on an Investment
Determination of the Gain or Loss Percentage
- Take the selling price and subtract the initial purchase price. The result is the gain or loss percentage.
- Take the gain or loss on the investment and divide by the original amount or purchase price of the investment.
- Finally, multiply the result by 100 to get the percentage change in the investment.
If the percentage is negative because the market value is lower than the original purchase price, also called the cost basis, there is a loss on the investment. If the percentage is positive because the market value or sales price is higher than the original purchase price, there is a gain on the investment.
Formula for Calculating the Gain or Loss Percentage
Percentage gain on investment = (Price sold – Purchase price) / Purchase price x 100
- The gain or loss percentage calculation will produce the dollar amount equivalent to the gain or loss in the numerator.
- To create a decimal, divide the dollar amount of the gain or loss by the original purchase price. The decimal shows how much the gain represents compared to how much was originally invested.
- Multiplying the decimal by 100 simply shifts the decimal to provide the gain or loss percentage compared to the original investment amount.
Alex GoodmanTo determine the gain or loss percentage without selling the investment, the calculation is very similar. The current market price would be substituted for the selling price. The result would be the unrealized gain (or loss), meaning that the gain or loss would be unrealized since the investment has not yet been sold.
The stock market is a highly efficient mechanism for transferring wealth from the impatient to the patient.
Burton Malkiel
Why is it Important to Calculate the Gain or Loss Percentage?
Calculating the gain or loss percentage on an investment is important because it shows how much has been earned compared to the amount needed to achieve the gain.
For example, if two investors earn $500 each by investing in the same stock, both earn the same profit. In principle, it appears that both investments obtained the same result. However, if one investor spent $20,000 buying the stock and the second one spent only $10,000, the second investor obtained better results because he risked less money.
In addition, the second investor could invest the other $10,000 (assuming they both had $20,000 to invest) in a second stock and make an additional profit.
Examples of Gain or Loss Percentage Calculations
The gain or loss percentage calculation can be used for many types of investments. Two examples are given below.
Advertisement
Stock
As an example, suppose an investor bought 100 shares of Intel Corp. stock (INTC) at $30 per share, which means that it cost him $3,000 for the initial investment (price of $30 * 100 shares).
The 100 shares were sold at $38 per share, which means that the proceeds from the sale would be $3,800 ($38 per share * 100). The dollar value of the gain on the investment would be $800 ($3,800 – $3,000).
The calculation of the percentage gain would be:
- ($3,800 proceeds from sale – $3,000 original cost) / $3,000 = 0.2667 x 100 = 26.67%.
- ($38 selling price – $30 purchase price) / $30 = 0.2666 x 100 = 26.67%.
Alternatively, the gain can be calculated using the price per share, as indicated below:
Index
If an investor wanted to determine how the Dow Jones Industrial Average (DJIA) index has performed over a given period, the same calculation would apply. The Dow is an index that tracks 30 stocks of the most established companies in the United States.
Let’s say, as an example, that the Dow opened at 24,000 and closed at 24,480 at the end of the week.The calculation of the percentage gain would be:
- (24,480 – 24,000) / 24,000 = 0.02 x 100 = 2%
Special Considerations: Commissions and Dividends
Investing is not without costs, and this should be reflected in the calculation of the gain or loss percentage. In the above examples, broker fees and commissions and taxes have not been taken into account.
To incorporate transaction costs, reduce the profit (selling price – purchase price) by the investment costs.
Fees
Using the Intel example above, let’s say the investor collected $75 in broker commissions. The percentage gain would be calculated as follows:
- (($3,800 sale – $3,000 original cost) – $75) / $3,000 = 0.2416 x 100 = 24.16%.
We can see that the brokerage commission reduced the percentage rate of return on investment by more than 2%, i.e. from 26.67% to 24.16%.
Dividends
If the investment paid any income or distribution, such as a dividend, the amount would have to be added to the amount of the gain. A dividend is a cash payment paid to shareholders and is configured on a per share basis.
Using the Intel example, suppose the company pays a dividend of $2 per share. Since the investor owned 100 shares, Intel would pay $200 spread evenly over four quarterly payments.The percentage gain would be calculated as follows:
- (($3,800 sale – $3,000 original cost) + $200) / $3,000 = 0.3333 x 100 = 33.33%.
Assuming there were no brokerage commissions and the shares were held for one year, we can see that the dividend increased the percentage rate of return on investment by more than 6%, i.e. from 26.67% to 33.33%.
If the shares were not held for one year and instead were held for two quarters, we would add $100 to the amount of gain (instead of $200), since the quarterly dividend payments would be $50 each.
By incorporating transaction costs, account fees, commissions and dividend income, investors can obtain a more accurate representation of the gain or loss percentage on an investment.
Wrap Up
In conclusion, determining your investment’s gain or loss percentage is a straightforward but crucial part of investing. You can make wise investment choices and quantify how much you have earned or lost on your investments if you know how to compute the percentage gain or loss.
FAQs
Calculating an investment’s percentage gain or loss is crucial since it reveals how much has been made or lost in relation to the initial investment. Additionally, it enables investors to contrast the outcomes of various investments made at various cost points.
You can determine the gain or loss percentage without selling your investment. The selling price would be replaced with the current market price, and the outcome would be the unrealized gain or loss.
When determining the gain or loss percentage on an investment, broker fees and commissions, among other transaction costs, should be taken into consideration. Reduce the profit (sales price – purchase price) by the investment costs to account for transaction costs.
The following equation can be used to determine the gain or loss percentage on an investment: (Selling price – Purchase price) / Purchase price x 100 equals the percentage gain or loss.
The calculation of the gain or loss percentage can be used to a variety of investments, including stocks, bonds, mutual funds, and indexes.
Article sources
At Capital Maniacs, we are committed to providing accurate and reliable information on a wide range of financial topics. In order to achieve this, we rely on the use of primary sources and corroborated secondary sources to support the content of our articles.
Primary sources, such as financial statements and government reports, provide firsthand evidence of financial events and trends. By using primary sources, we are able to directly reference information provided by the organizations and individuals involved in these events.
Secondary sources, such as financial analysis and commentary, interpret and analyze primary sources. While these sources can be useful for providing context and background information, it is important to use corroborated sources in order to ensure the accuracy and reliability of the information we present.
We take pride in properly citing all of our sources, both primary and secondary, in order to give credit to the original authors and to allow our readers to verify the information for themselves. We appreciate your trust in our website and are committed to upholding the highest standards of financial journalism.
- Financial Industry Regulatory Authority – Cost Basis BasicsβHereβs What You Need to Know
- Financial Industry Regulatory Authority – Capital Gains and Losses
- S&P Dow Jones Indices – Comparing Iconic Indices: The S&P 500 and DJIA
- Bureau of Economic Analysis – How Are Dividends Defined in the U.S. National Accounts?
