So, you’ve taken a big step in your financial life and invested some of your money. Congratulations! Eventually, however, you’ll want it back—and then some. That’s what we mean when we use the term “return” in relation to investing.
What’s a return?
A return is what you get out of your investment. If you’re thinking of investing and wondering what’s in it for me, the answer is a return on your investment.
You can see a “return” in other areas of your life, too. For example, when you exercise or follow a strict diet, you see a return in the form of bigger muscles and lower levels of body fat. Likewise, if you earn a college degree or learn a trade, your return potentially arrives in the form of additional career opportunities and job offers.
But when it comes to your finances and investments, here are some key things to remember about returns:
- A return can be positive or negative.
- A return can be expressed as a dollar amount or as a percentage.
- A change in the price of an asset (either positive or negative) is the most common form of return.
How your return is calculated and distributed
Returns are doled out in various ways, but generally, they hit your account as a dividend or interest payment, or a capital gains distribution. You also see a return when the price of one of your assets changes—if you bought a stock for $1, for example, and its price increases to $2, your return on that stock is $1, or 100%.
If the price goes down, on the other hand, to $0.50, your return would be -$0.50, or -50%—remember, a return can be both positive and negative.
Here are three equations to help calculate your return:
- (Current Price – Purchase Price) = Change in Price
- (Change in Price + Dividends and Interest + Capital Gains Distributions) = Return in dollars
- (Change in Price + Dividends and Interest + Capital Gains Distributions) divided by (Purchase Price) = Return as a percentage
Dividends, interest and capital gains
A price change is fairly easy to understand. But what about capital gains and dividends?
A dividend is your cut of a company’s earnings. If you own shares in a company, you get a slice of the pie in the form of a cash payout.
Interest payments are generally paid to holders of bonds and other fixed-income securities. Bondholders are due interest payments, as they’re holding debt. Like a dividend, an interest payment typically takes the form of a cash payout.
Finally, capital gains distributions occur when a stock or bond held in a fund (like an ETF) is sold at a profit. The profit is divvied up and paid to shareholders, just like a dividend.
If you’re using Stash, however, you don’t need to worry about these pesky calculations—the app will do all the work for you.