What is the rate of return? The concept and formula of accuracy

As we all know, the rate of return plays an important role in many fields. The higher the rate of return, the greater the profit. You are wanting to learn about what is the rate of return of a stock ? - The formula for calculating the rate of return in Excel and the meaning of the rate of return in investing in stocks .

The rate of return of the stock brings profit to the investor

What is the stock's rate of return?

Rate of return is defined as the ratio between the profit received and the total capital invested in a certain period of time. This period can be for a month, a quarter, a half year, or a full year.

Likewise, stock return is the fraction of profits that listed companies allocate to their outstanding shares. To calculate the rate of return on shares, investors can base on the dividend, split shares to calculate the adjusted share price, thereby estimating the time to recover the invested capital and predict the profit. have future expectations.

What factors affect stock returns?

Stocks are investment securities that bring high profitability but also many risks that players need to face. Investors will hold shares for a long period of at least 1 year. This can last 3-5 years or a lifetime. The potential issuer of shares will use capital flow to operate and develop. After a period of development, the stock price increased, and the company's profits were large.

At this time, investors get stock returns that will include: The difference in stock prices and dividends evenly distributed from the business, depending on the number of shares held.

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The formula for calculating the rate of return of a stock

FV = PV x (1+r) ^ n

Inside

FV: Future Value
PV: Present Value
R: Rate of return
n: Number of periods.

Illustrative example:

Example of rate of return

How to calculate a stock's rate of return using Excel

Source: https://en.extendoffice.com/

For example, you buy a stock on 2015/5/10 for $15.60, sell it on October 2017 for $25.30, and receive an annual dividend like the screenshot below. Now I will guide you to calculate return on stock easily by XIRR in Excel.

Source: https://en.extendoffice.com/

1 . Select the cell where you will put the calculation result and enter the formula =XIRR(B2:B13, A2:A13) and press Enter key. See screenshot:

Note : In the formula =XIRR(B2:B13, A2:A13), B2:B13 is the Cash Flow column that records the amount you paid and received, and A2:A13 is the Date column.

Source: https://en.extendoffice.com/

2 . Keep the calculation result selected and click the Percent style button on the Home page and click the Increase Decimal or Decrease Decimal button to change the decimal place of the percentage. See screenshot:

Source: https://en.extendoffice.com/

Now the stock return rate is calculated and displayed as a percentage. See screenshot:

Factors affecting stock returns for investors

When choosing stocks, investors should consider three factors:

Market: The market factor is important because stock prices largely fluctuate according to market prices. In addition, it is also important to be aware of the side effects of this factor. That is, the changing market factors always have a strong impact on large-sized stocks. When the market changes, the rate of return of this stock will be a lot if it gains but also a lot if it loses. Therefore, if you hold stocks, you must pay special attention to changes in market factors. On the contrary, if you are concerned about the volatility of the market, you should choose stocks with a small size.

Scale: This is also an important factor to consider after the market factor. Investors need to keep an eye on the average gap between small and large stock returns. If this gap is seen to increase, then buy small stocks and sell large stocks. In addition, it is also important to know that at this time, it is advisable to buy low-margin stocks and sell high.

Value: In terms of value, investors need to keep an eye on the average gap between high and low B/M stock returns. If this gap is seen to increase in the near future, it is advisable to buy stocks with high B/M and sell low. In addition, similar to the size factor, investors also need to know that this time should buy low-yielding stocks and sell high-yield stocks.

However, investors should be cautious with earnings data published by companies on the stock market. Because there are companies that incorrectly report operating profits. To create a competitive advantage for your company in the market.

What is the role of stock returns?

Return rate is considered as one of the important variables in determining stock price. At the same time, it has a huge influence on stock trading activities. This is the basis for investors to make buying or selling decisions.

Investors should consider when choosing investment stocks

However, investors should also consider because financial markets are always volatile. Therefore, buying shares of high-profit companies to enjoy high profitability is also relatively affordable.

Besides, stocks of low operating profit companies, combined with low market value, still have the potential to deliver high returns. Due to the potential to increase back to real value in the future.

In fact, these probabilities still have significant fluctuations. Therefore, it is necessary to accurately calculate the fertility rate to make a decision.

In the above article, we have summarized some important information about the profitability of stocks. Hope these sharing will bring you useful information. Do not forget to follow the website: https://finnews24.com to be updated with more investment knowledge.

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