If you hold on to a stock for an extended period of time, the shares in your portfolio may yield dividends, multiply as a result of a stock split, or decline in number due to a reverse split. The company may even cease to exist as a result of a merger, acquisition or bankruptcy. It is therefore important to understand how to calculate the rate of return of a stock investment after you sell or otherwise get rid of shares.
Add all dividends you have received from the stock since your purchase to the net sales proceeds. Your net sales proceeds equal the cash received as a result of selling all shares that can be traced back to your original purchase. If the number of shares in your account has multiplied as a result of a stock split or has declined due to a reverse split, the number of shares you sold will not be the same as the number of shares you originally purchased. Regardless, add dividends to the sales proceeds of the shares that have descended from your original purchase.
Divide the total figure you calculated in Step 1 by the purchase price. Again, keep in mind that the number of shares bought and sold may not be the same. Assume you bought 100 shares of XYZ Company for $42 per share, or for a total of $4,200, on Jan. 1. After a 2-for-1 stock split you ended up with 200 shares, which you sold at $22 per share, for total sales proceeds of $4,400 on June 1. Also, assume that during the period you held the shares, the issuing firm paid dividends worth $200. The sum of your sales proceeds and dividends is $4,400 + $200 = $4,600. Therefore, you must divide $4,600 by $4,200. The result is 1.0952
Raise the figure found in Step 2 to the power of (365 / number of days you held the stock) and subtract one from the result. Multiply the result by 100 to find the annual rate of return in percentage terms. In this case, you held the stock for a total of 517 days between Jan. 1, 2012, and June 1, 2013. So you must raise 1.09 to the power of (365/517) or 0.706. Subtracting one from the result and multiplying the outcome by 100 gives you an annual return of 6.63 percent. In other words, the money invested in XYZ shares grew at a rate of 6.63 percent per year.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.