You buy shares to make money – and that’s why before you sell your shares the thing you need to know most is what return have you made on your money.
This is known as percentage gain and looks at how much money you have now versus how much money you initially invested in a share.
Luckily, there’s a simple calculation you can use to calculate your total return on your investment, explains Gareth Stokes in Fear, Greed and the Stockmarket.
A simple way to calculate your share returns
Let’s say that, at the beginning of 2012, while scanning the stock market, you decide Tiger Brands looks promising because of its defensive exposure to domestic food brands.
For this reason, you decide to buy 250 Tiger Brands shares at a price of R246.
Your initial position is as follows: number of shares x price of shares = total investment
250 Tiger Brands shares at R246 per share = total initial investment of R61,500
On 11 January 2013 (one year later), you want to determine the return you’ve earned on your Tiger Brands investment to see if it’s a good idea to sell out and bank your profit.
To make a correct assessment you need to know two things.
Number one, you need to determine the price of Tiger Brands shares on the closing date, 11 January 2013 for our example. And, number two, you need to know the dividends paid to you by Tiger Brands during the year.
During 2012, Tiger Brands paid two dividends (an interim dividend and a final dividend) totalling R7.23. You then need to establish the latest price of Tiger Brands shares, which were changing hands at R313 per share on the date in question.
Now you need to calculate your total gain as follows: Closing price – initial price + dividends
R313 – R246 = R67 (the capital gain for the period under review) PLUS R7.23 (the value of the dividends paid for the period under review).
WOW! You’ve clearly made some money on this transaction.
Now work out your total return using this formula:
((Capital return + dividend) / purchase price) x 100
For this transaction, your total return is (R67 + R7.23) / by your initial purchase price (R246) and equals an impressive 30% return in just one year!
That’s great news! But remember, you won’t realise the return on your investments until you sell these shares.