5/23/2018 Types of Return on Investment | Finance - Zacks

Types of Return on Investment

Return on investment can be measured several ways.

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The return on investment is a general term that refers to how well an investment is performing over time. There
are many different ways of looking at return on investment, however, which can be confusing if you're trying to
decide which investment is really doing the best. Before you're awed by a speci c return gure, make sure you
know what it means so you can make an apples-to-apples comparison with your other investment options.

Return Components
When you look in the newspaper, you only see whether the stock price has gone up or down. As a result, many
people overlook the power of dividends in guring the return on investment. See, when a company pays out a
dividend, it's transferring a portion of its value to the shareholders, so the stock price is less than it would
otherwise be, if all the value remained with the company. So, when you're guring the total return, you include
any dividends received as well as the increase in the price of the stock.
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 5/23/2018 Types of Return on Investment | Finance - Zacks
Total Return
The total return on investment measures how well the investment has done over any speci ed period of time in
raw dollar gures. For example, you could calculate the total return on a stock over one month or over 10 years.
Suppose you invested $5,000 in a stock, you received $200 in dividends while you owned it, and it's now grown
to $5,500. Your total return is $700 -- $200 in dividends and $500 in stock appreciation.

Percentage Return
The downside to hearing a total return gure, whether it's $700 or $7,000, is that you don't know how much
money someone had to invest to generate the return. For example, while $7,000 sounds much more impressive
than $700, the investment loses its luster if you learn the $7,000 return was generated by a $500,000 investment
when the $700 return was generated with only a $5,000 investment. So, to account for investment size, you can
use the percentage return instead. The percentage return equals the total return divided by the investment
amount, multiplied by 100. For example, a $700 return on $5,000 means a 14 percent return.

Average Annual Return

The average annual return takes the percentage return one step farther to take into account how long you held
the investment, but the math gets more complicated, too. Even a 14 percent return isn't so snazzy if it takes
eight years to earn it. To gure the average annual return, add 1 to the percentage return as a decimal. Then,
raise that number to the power of 1 divided by the number of years it took to accumulate. Finally, subtract 1 from
the result and multiply by 100. For example, if your 14 percent return took ve years, add 1 to 0.14 to get 1.14.
Then raise 1.14 to the 1/5th power to get 1.0266. Then, subtract 1 and multiply by 100 to nd the investment
averaged an annual return of 2.6 percent.

References (2) (#)

Photo Credits
Zedcor Wholly Owned/PhotoObjects.net/Getty Images
About the Author
Mark Kennan is a writer based in the Kansas City area, specializing in personal nance and business
topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The
Motley Fool."

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