How to Calculate Stock Market Returns, Breakeven and Basis Points

Investing in the stock market can be quite exciting for investors. In order to get the maximum benefit, you can calculate the returns that you get and based on that, you can either continue to hold a stock or sell it. You can get information about specific, individual stocks on BankBazaar. The returns are measured by closely watching the performance of your stock and can be measured both when you are holding your stocks and when you actually sell the stock. It would be best to sell the stock after you have calculated the return and deemed it absolutely necessary to sell the stock in order to derive maximum benefit. There are a number of ways to calculate returns. Some of them are listed here:

If you want to know if you will be making a profit or not, at the very basic level, you can simply look at the price of the stock when you first bought it and compare the current price of the stock. If the current price is higher than the original price, then you stand to make a profit. However, the percentage and quantity of the profit will depend on the actual increase. A miniscule increase in the price will not help unless you hold a large number of shares.

Breakeven point

While considering returns, you also need to consider something called the breakeven point. The term indicates the minimum value or price point at which you can sell your stock and not lose money even if you do not make a profit. Assume you have bought ten shares of a company at Rs.10 each. If the price of the stock increases over time, to say, Rs.15, then selling at that price will make you a profit. At this point, you can either sell the stock or continue to hold it in hopes of increasing your profit. Assume you continue holding the stock and the price begins dropping. Until about Rs.10.01 you can still make a profit, miniscule as it may be. You will have reached the breakeven point when the price of the stock has reached Rs.10. Anything lower than that price, even Rs.9.99 will be result in a loss. While the aim of investing in the stock market is to return a profit, sometimes breaking even might be the best option available under the circumstances. This is true especially in cases in which you invest in a low-priced stock (when the market might be down) with the consideration that the price will increase later in time. If the price does not increase by much, or if the stock appears to fluctuate a lot between increasing and decreasing in price, then it would be best to minimise your losses. Selling at the breakeven point might be a good idea in such cases. While it means that you may not make a profit, it also means that you will not make a loss. Thus, you can recover your investment.

Calculating the return percentage

One way to calculate return is by watching the index that comprises the stock that you have invested in. In order to calculate the return on an index, you should know two prices. One price will correspond to the time when you bought the stock and the other price will be the current price. Then, you need to find the difference in value between the original and the current price. This difference is the change in the index. The change in the index is to be divided by the starting (original) price that you have considered. The value that you get needs to be multiplied by 100 in order to arrive at the percentage change in the index value. This will let you know if you have got a good return on the index.

Thus, the formula can be expressed as:

((Current value – Original value) / Original value) x 100 = Return (in %)

If you have received any dividends over the course of the time period that you are considering in order to calculate the return, then you need to use the following formula:

(((Current value – Original value) + Dividend value) / Original value) x 100 = Return (in %)

The formula given above in order to calculate returns using dividends is the same as the one used to calculate returns. The only change is the addition of the dividend value to the difference in the current and original values before the division.

Basis Point

The term basis point refers to the change in the value of some financial instrument. This is usually used when talking about bonds or interest rates that are set. This is not a common term used in stock market trading. This is because, the change in the basis point is expressed as a certain number. Assume there was a change of 25 basis points. This means that the change in the percentage value was 0.25%. When mentioning changes in the stock market, it would be best to describe the actual price change instead of mentioning the basis point change. Not all changes in the basis points regarding your bonds or interest rates will change your return. The effect of the change in interest rates might affect the rate of your return.

Conclusion

It is important to consider calculating the expected return before taking a decision with a stock investment. This way, you can avoid making a loss. The simplest way is to check if you will be able to make a profit is by checking if the current trading price of a share is higher than the price at which you bought it. In order to calculate the return percentage, you can use the formulae given above. It would be best to keep in mind that sometimes, breaking even might be the best way forward.

DISCLAIMER:

The contents of this post/blog does not constitute financial or other professional advice nor does it imply in any manner a principal-agent relationship, and is not a professional advice on a specific financial matter.

, , , , ,

Leave a Reply