Return
is a measure of investment gain or loss. For example, if you buy
stock for $10,000 and sell it for $12,500, your return is a $2,500
gain. Or, if you buy stock for $10,000 and sell it for $9,500,
your return is a $500 loss. Of course, you don't have to
sell to figure return on the investments in your portfolio. You
simply subtract what you paid from their current value to get
a sense of where you stand.
Long-term investors are interested in
total return, which is the amount your investment increases
or decreases in value, plus any income you receive. Using the
same example, if you sold a stock investment for a $2,500 gain
after you'd collected $150 in dividends, your total return
would be $2,650.
If you want to compare total return on two
or more investments that you bought at different prices, you need
to figure percent return. You do that by dividing the total return
by your purchase price. For example, a $2,650 total return on
an investment of $20,000 is 0.1325, or a 13.25% return. In contrast,
a $2,650 total return on an investment of $30,000 is an 8.84%
return. So while each investment has increased your wealth by
the same amount, the performance of the first is more than twice
as strong as the performance of the second.
