Learning how to calculate the percentage gainof your investment is straightforward and is a critical piece of information in the investor toolbox.
To calculate the percentage gain on an investment, investors need to first determine how much the investment originally cost or the purchase price. Next, the purchase price is subtracted from the selling price of the investment to arrive at the gain or loss on the investment.
If investors don't have the original purchase price, they can obtain it from their broker. Brokerage firms provide trade confirmations in paper form or electronically for every transaction, including the original purchase and the sale price as well as the financial details of the investment.
Key Takeaways
- In calculating the percentage gain or loss on an investment, investors need to first determine the original cost or purchase price.
- Next, the purchase price is subtracted from the selling price of the investment to arrive at the gain or loss on the investment.
- Take the gain or loss from the investment and divide it by the original amount of the investment or purchase price.
- Finally, multiply the result by 100 to get the percentage change in the investment.
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. 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
Investmentpercentagegain=purchasepricePricesold−purchaseprice×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.
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%
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.
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.
Why do I Need to Understand the Percentage Gain or Loss of an Investment?
Understanding the percentage gain or loss of a security helps investors determine the significance of aprice movement. Investors can use percentage change to compare an investment’s historical performance or as a measure of relative strength or weakness when comparing an asset against its peers. Percentage gain or loss also helps investors determine a security’s volatility by the size of its change.
In a Nutshell, How do I Calculate an Investment’s Percentage Gain or Loss?
To calculate the percentage gain or loss of an investment, work out the difference between the purchase price and selling price, then take the gain or loss from the investment and divide it by the initial purchase price. Finally, multiply that figure by 100 to determine the investment's percentage change. To determine an unrealized percentage change, investors simply substitute the sale price with the current market price.
What Rule of Thumb Percentage Gain or Loss Figures Do Investors Need to Know?
Investors typically define a stock correction as a 10% decline from its most recent peak. While there is no specific threshold for stock market crashes, they are generally considered an abrupt double-digit percentage drop in a stock or index over a short time frame. Meanwhile, many financial advisors recommend a portfolio consisting of 60% stocks and 40% bonds to balance risk and reward.
What Other Factors Should I Consider When Calculating an Investment’s Percentage Gain or Loss?
The publicly quoted percentage change of a security does not factor in fees, such as commissions, slippage, and holding costs. Investors should factor these into their calculations for a more accurate representation of an investment’s percentage gain or loss. Similarly, investors should add distribution payments, such as dividends into their percentage calculations to help determine an investment’s total returns.
The Bottom Line
Understanding the percentage gain or loss of an investment helps investors make performance comparisons and assess risk. Calculating a security’s percentage change is straightforward, requiring only the purchase and sale price. Investors can determine unrealized percentage movements by replacing the sale price with the current market price. To get a better representation of an investment’s percentage gain or loss, investors should factor in costs, such as commissions as well as income received from distributions like dividends.
