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Calculating Rate of Return

How to calculate rate of return (ROR) for an investment?


If you have no idea how can we make money through stock, it is advisable to first read this

In an previous article, we have discussed on how to calculate the rate of return (ROR) of dividend stock. Today, let’s see how could we calculate the overall ROR for a year. (You may notice that some books or individuals prefer to use ROI (Return of Investment) instead of ROR. These two are basically the same thing. )
Portfolio:
  UnitsBuy In PriceTotal CostCurrent PriceTotal RevenueDividend per shareTotal DividendDY
1Stock A1000RM2.00RM2,000.00RM2.10RM2,100.00RM0.10RM100.005%
2Stock B2000RM0.80RM1,600.00RM1.10RM2,200.00RM0.00RM0.000%
3Stock C500RM6.20RM3,100.00RM6.00RM3,000.00RM0.50RM250.008%
4Stock D1000RM1.50RM1,500.00RM1.70RM1,700.00RM0.03RM30.002%
5Stock E1500RM2.00RM3,000.00RM2.30RM3,450.00RM0.00RM0.000%
    RM11,200.00 RM12,450.00 RM380.00 

Assuming above are the stocks that we have in portfolio and we have sell all of them by the end of the year. Here, there are both capital gain revenue and dividend payout earning. Hence, the rate of return should include both earning.

Rate of Return = Revenue Earned / Initial Capital

Rate of Return (Capital Gain) = (12450-11200)/11200 *100% = 1250 / 11200 *100% = 11.2%

Rate of Return (Dividend) = 380 / 11200 *100% = 3%

Total Rate of Return = (1250+380)/11200 * 100% = 14.55%

Assuming the portfolio is for real, 14.5% is definitely a good return for a year. Nevertheless, it should be noted that this 14.5% can only be achieved only if you sell out all your existing stock. Else, there will be no capital gain revenue at all for the year. In that case, although the share price has increased, they will only be recorded as paper gain.

Since the paper gain is not realised, there will only be ROR for dividend. As a result, the annual ROR is only 3%. Hence, it is again very important to invest on dividend stock as they provide constant revenue, even during stock crisis period.


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