Stock Market Foundations · Stocks Explained
Measure the whole result
For a simple holding with no additional purchases, total return before costs equals ending share value plus cash dividends minus the original investment, divided by the original investment. Reinvesting distributions or adding money at different dates requires a more careful calculation.
A dividend yield measures a distribution relative to a share price. It is not a promise of total return. A falling share price can make a historical yield look attractive even while the business weakens.
Work through a complete example
Suppose you buy 100 shares for $40 each. The shares later trade at $43 and you have received $80 in dividends. Your starting investment was $4,000. The ending shares are worth $4,300, so the gain including dividends is $380, or 9.5%.
If purchase and sale costs total $20, the gain falls to $360, or 9%, using the original share purchase as the simplified denominator. A precise account calculation includes the dates and cash paid for every cost. Taxes and currency conversion can reduce the amount retained further.
Losses change the recovery arithmetic
An investment that falls from $100 to $60 has lost 40%. Returning from $60 to $100 requires a gain of about 66.7%. Equal percentage losses and gains do not cancel because they apply to different starting amounts.
Volatility describes fluctuation. Permanent loss can arise when the underlying business cannot recover its earning power or a claim is severely diluted. A quiet price history does not prove the absence of risk.
Keep the comparison consistent
Compare investments over the same period, in the same currency and with the same treatment of dividends and fees. Distinguish nominal returns from purchasing power. A positive nominal return can still buy fewer goods after inflation.
Use a range of plausible outcomes before investing. Historical returns provide context, but they do not establish the return that a specific investor will earn next.
Try it yourself
A $2,000 holding ends at $1,900 and pays $60 in dividends. What is its return before costs?
Show the worked answer
The net change is $1,900 plus $60 minus $2,000, which is a $40 loss. The return is minus 2%. The dividend did not fully offset the price decline.
Further reading
Educational material. Examples are hypothetical and do not recommend a security or a personal allocation.
