The primary objective of investing in the market is to make profits. Investors purchase stock from brokers or directly at a set purchase price, and when the time is right, they sell it to make a gain on their investment. This is the primary method of making gains from the market. The stocks may be held long-term or short term; it all really depends on the type of tax regime the investor is trying to follow.
Investment gains depend totally on the purchase and sale price; nothing else impacts the figure as much as these two values. Let's understand % gains in a little more detail.
What is % Gain?
In order to understand percentage gain, it is first important to understand what gain is. Gain is defined as a rise in the value of an asset (like market securities) that you own. Say, for example, that you ought 50 shares worth $100 at the beginning of the month. By the end of the month, those shares were valued at $150 when you sold them. Since the price of the sale was higher than the price of purchase for an asset, it resulted in a gain. As opposed to losses that happen when the sale price is lower than the purchase price, gains are what make investors stay invested in the market.
Percentage gain, or % gain, is a value obtained from the purchase and sales prices of a stock by using a stipulated formula.
Determining Percentage Gain or Loss
- Take the selling price and subtract the initial purchase price. The result is the gain or loss.
- Take the gain or loss from the investment and divide it by the original amount or purchase price of the investment.
- Finally, multiply the result by 100 to arrive at the percentage change in the investment.
If the percentage turns out to be negative because the market value is lower than the original purchase price—also called the cost basis—there's a loss on the investment.1 If the percentage is positive because the market value or selling price is greater than the original purchase price, there's a gain on the investment.
Formula for Calculating Percentage Gain or Loss
\text{Investment percentage gain} = \frac{\text{Price sold} – \text{purchase price}}{\text{purchase price}} \times 100
- The percentage gain or loss calculation will produce the dollar amount equivalent of the gain or loss in the numerator.
- The dollar amount of the gain or loss is divided by the original purchase price to create a decimal. The decimal shows how much the gain represents compared to how much was originally invested.
- Multiplying the decimal by 100 merely moves the decimal place to provide the percentage gain or loss as compared to the original investment amount.
To determine the percentage gain or loss 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 the gain or loss would be unrealized since the investment had not yet been sold.
Why Calculating Percentage Gain or Loss Is Important
Calculating the gain or loss on an investment as a percentage is important because it shows how much was earned as compared to the amount needed to achieve the gain.2
For example, if two investors each earned $500 from investing in the same stock, they both had the same amount of gain. At the onset, it appears that both investments achieved the same result. However, if one investor spent $20,000 when the stock was originally purchased, and the second investor spent only $10,000, the second investor performed better because less money was at risk.
Also, the second investor could invest the other $10,000 (assuming both had $20,000 to invest) in a second stock and earn an additional gain.
Examples of Calculating Percentage Gain or Loss
The percentage gain or loss calculation can be used for many types of investments. Below are two examples.
Stock
As an example, let's say an investor bought 100 shares of Intel Corp. (INTC) at $30 per share, which means that it cost $3,000 for the initial investment ($30 price * 100 shares).
The 100 shares were sold for $38 per share, which means that the sale proceeds 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 percentage gain calculation would be:
- ($3,800 sale proceeds – $3,000 original cost) / $3,000 = 0.2667 x 100 = 26.67%.
Alternatively, the gain can be calculated using the per-share price, as follows:
- ($38 selling price – $30 purchase price) / $30 = 0.2666 x 100 = 26.67%.
Index
If an investor wanted to determine how the Dow Jones Industrial Average (DJIA) has performed over a certain 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 by the end of the week.
The percentage gain calculation would be:
- (24,480 – 24,000) / 24,000 = 0.02 x 100 = 2%
Special Considerations: Fees And Dividends
Investing does not come without costs, and this should be reflected in the calculation of percentage gain or loss. The examples above did not consider broker fees and commissions or taxes.
To incorporate transaction costs, reduce the gain (selling price – purchase price) by the costs of investing.
Fees
Using the Intel example above, let's say that the investor was charged $75 in fees from the broker. The percentage gain would be calculated as follows:
- (($3,800 sale proceeds – $3,000 original cost) – $75) / $3,000 = 0.2416 x 100 = 24.16%
We can see that the brokerage fee reduced the percentage rate of return on the investment by more than 2% or from 26.67% to 24.16%.
Dividends
If the investment paid out any income or distributions, such as a dividend, the amount would need to be added to the gain amount. A dividend is a cash payment paid to shareholders and is configured on a per-share basis.4
Using the Intel example, let's say the company paid a dividend of $2 per share. Since the investor owned 100 shares, Intel would pay $200 split up evenly into four quarterly payments.
The percentage gain would be calculated as follows:
- (($3,800 sale proceeds – $3,000 original cost) + $200) / $3,000 = 0.3333 x 100 = 33.33%.
Assuming there were no brokerage fees and the stock was held for one year, we can see that the dividend increased the percentage rate of return for the investment by more than 6% or from 26.67% to 33.33%.
If the stock wasn't held for one year and, instead, was held for two quarters, we would add $100 to the gain amount (instead of $200) since the quarterly dividend payments would be $50 each.
By incorporating the transaction costs, account fees, commissions, and dividend income, investors can obtain a more accurate representation of the percentage gain or loss on an investment.
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