Though picking stocks might feel like throwing darts at a copy of the business section of the newspaper sometimes, tracking your returns is much easier. Measuring your returns helps you decide whether an investment is meeting your expectations. You can use either the holding period yield or the annual period yield depending on what you're trying to measure.
Purpose of Different Calculations
The holding period represents your total return while you held a particular investment. The annual period return takes the holding period yield and converts it to how much the investment return averaged each year that you held the stock. For example, if you want to determine how well a stock has performed since you bought it, the holding period yield works well. However, if you want to compare the performance of stocks you've held for different periods of time, you'll get skewed results if you use the holding period yield. Instead, you need to use the annual period yield to account for the time differences.
If you don't have all the information, you can't calculate the yields correctly. Obviously, you need to know how much you invested and how much you sold the stock for. You also need to know if you've received any income from the investment while you've owned it. For example, if the stocks pay dividends, any dividends you received while owning the stock increases your yield. Finally, to calculate the annual period yield, you need to know how many years you've held the investment.
Calculating the Holding Period Yield
To figure the holding period yield, add any income, such as dividends, to the selling price of the stock. If you still own it, use the current value. Next, subtract what you paid for the stock. Finally, divide the result by the purchase price to find the holding period yield. For example, if you sold a stock for $56 per share and received $5 of dividends per share while you owned it, your total return is $61. If you paid $52, your holding period gain is $9. Then divide $9 by $60 to find your holding period yield is 0.15, or 15 percent.
Calculating the Annual Period Yield
To figure the annual period yield, you need to first calculate the holding period yield. After you have the holding period yield, add 1 to the holding period yield as a decimal. Then, divide 1 by the number of years you held the stock. Finally, raise your holding period yield plus 1 to the power of 1 divided by the holding period to find the annual period yield. For example, if your holding period return is 15 percent, add 1 to 0.15 to get 1.15. Then, if you held the stock for four years, divide 1 by 4 to get 0.25. Finally, raise 1.15 to the 0.25th power to find your annual period return is 1.036, or about 3.6 percent.
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