The gain or loss of an investment over a certain period Show
What is a Rate of Return?A Rate of Return (ROR) is the gain or loss of an investment over a certain period of time. In other words, the rate of return is the gain (or loss) compared to the cost of an initial investment, typically expressed in the form of a percentage. When the ROR is positive, it is considered a gain, and when the ROR is negative, it reflects a loss on the investment. Video Explanation of Rate of ReturnWatch this short video to quickly understand the main concepts covered in this guide, including the definition of rate of return, the formula for calculating ROR and annualized ROR, and example calculations. Formula for Rate of ReturnThe standard formula for calculating ROR is as follows:  Keep in mind that any gains made during the holding period of the investment should be included in the formula. For example, if a share costs $10 and its current price is $15 with a dividend of $1 paid during the period, the dividend should be included in the ROR formula. It would be calculated as follows: (($15 + $1 – $10) / $10) x 100 = 60%Example Rate of Return CalculationAdam is a retail investor and decides to purchase 10 shares of Company A at a per-unit price of $20. Adam holds onto shares of Company A for two years. In that time frame, Company A paid yearly dividends of $1 per share. After holding them for two years, Adam decides to sell all 10 shares of Company A at an ex-dividend price of $25. Adam would like to determine the rate of return during the two years he owned the shares. To determine the rate of return, first, calculate the amount of dividends he received over the two-year period: 10 shares x ($1 annual dividend x 2) = $20 in dividends from 10 sharesNext, calculate how much he sold the shares for: 10 shares x $25 = $250 (Gain from selling 10 shares)Lastly, determine how much it cost Adam to purchase 10 shares of Company A: 10 shares x $20 = $200 (Cost of purchasing 10 shares)Plug all the numbers into the rate of return formula: = (($250 + $20 – $200) / $200) x 100 = 35%Therefore, Adam realized a 35% return on his shares over the two-year period. Annualized Rate of ReturnNote that the regular rate of return describes the gain or loss, expressed in a percentage, of an investment over an arbitrary time period. The annualized ROR, also known as the Compound Annual Growth Rate (CAGR), is the return of an investment over each year. Formula for Annualized RORThe formula for annualized ROR is as follows: Similar to the simple rate of return, any gains made during the holding period of this investment should be included in the formula. Example of Annualized Rate of ReturnLet us revisit the example above and determine the annualized ROR. Recall that Adam purchased 10 shares at a per-unit price of $20, received $1 in dividends per share each year, and sold the shares at a price of $25 after two years. The annualized ROR would be as follows: (($250 + $20) / $200 )1/2 – 1 = 16.1895%Therefore, Adam made an annualized return of 16.1895% on his investment. Alternative Measures of ReturnReturn can mean different things to different people, and it’s important to know the context of the situation to understand what they mean. In addition to the above methods for measuring returns, there are several other types of formulas. Common alternative measures of returns include:
More ResourcesThank you for reading CFI’s guide to Rate of Return and How to Calculate ROR. To continue advancing your career, these additional resources will be useful:
Is 10 percent a good rate of return?Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average. Some years will deliver lower returns -- perhaps even negative returns.
How do I get a 10% annual return?HOW TO EARN A 10% ROI: TEN PROVEN WAYS. Paying Off Debts Is Similar to Investing. ... . Stock Trading on a Short-Term Basis. ... . Art and Similar Collectibles Might Help You Diversify Your Portfolio. ... . Junk Bonds. ... . Master Limited Partnerships (MLPs) ... . Investing in Real Estate. ... . Long-Term Investments in Stocks. ... . Creating Your Own Company.. How long does it take a 10% return to double?The most basic example of the Rule of 72 is one we can do without a calculator: Given a 10% annual rate of return, how long will it take for your money to double? Take 72 and divide it by 10 and you get 7.2. This means, at a 10% fixed annual rate of return, your money doubles every 7 years.
Is a 10% annual return realistic?The average stock market return is about 10% per year for nearly the last century. The S&P 500 is often considered the benchmark measure for annual stock market returns. Though 10% is the average stock market return, returns in any year are far from average.
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What is 10% rate of return?
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