HOW TO CALCULATE or MEASURE YOUR RETURN ON INVESTMENT - ROI in your Stock Market Investment
What motivates me to write this super newbie investing article?
1st due to the amount of questions I am receiving from newbie stock market investors and day-traders, 2ndly I see various people who's investing in Philippine stock market for Months and esp to those who just started recently that they measure their ROI by the amount of money that they get.. Or amount of Income that they received upon selling a certain stock or shares. This is a super newbie article so if you think that this is stupid then this article is not for you maybe you are a super investor.
This information is basic however, most newbie's don't understand or know about how to calculate or measure their ROI simply because they jump-in and started buying/selling stocks without investing first on their financial education such as basics of investing etc....
Should i measure my return on investment by the amount of income i received? the answer is NO. example If you earned Php1,000,000 in 1 Year BIG Money isn't it?!?? however, if you invested Php 20,000,000 that is merely a 5% ROI - GROSS, Minus the trading charges/tax it will only be 3.x% minus 4% Inflation rate meaning you earned NEGATIVE 1 (-1.x%). Get the point?
Another issue i see is that newbie traders and investors don't care about TAX / Trading Charges they are Fooled by the amount of income that they received. Let's get started by defining first what is an ROI.
What does Return On Investment
(ROI) Mean?
A
performance measure used to evaluate the efficiency of an investment or to
compare the efficiency of a number of different investments. To calculate ROI,
the benefit (return) of an investment is divided by the cost of the investment;
the result is expressed as a percentage or a ratio.
Source of the Description: www.Investopedia.com
How To Calculate Your ROI:
Sample Transaction:
| You BUY 5,000 shares of XYZ Company at Php 100 Per Share | Total Amount Invested: Php 500,000 (assuming that Tax/trading charges not yet included) |
| After 5 Days you SELL 5,000 shares of XYZ company at Php 120 Per Share | Total Selling Amount: Php 600,000 (assuming that Tax/trading charges not yet included) |
| Lets Apply the 1.30% TAX and Online Trading Charges | Minus 1.30% on Php 600,000 (Php 600,000 x 0.0130 = Php 7,800) |
| Total Net Amount Received Php 592,200 (Php 600,000 - Php 7,800) | |
ROI Computation:
Php 592,200 (Gains from Investment) Minus Php 500,000 (Cost of Investment) = Php 92,200
Php 92,200 Divided by Php 500,000 = 0.1844 X 100 (constant value) = 18.44%
So your NET Return On Investment is 18.44%
The return on investment formula:source of the formula: Investopedia.com
So even if you just invested Php 100 but you earned Php 100 it means that your ROI is 100%.
That is FAR better than you invested Php 10,000 then you just earned Php 500 that is merely a 5% ROI.
You get the point?
It doesn't make sense to measure your Return On Investment by solely relying on the amount of income you received.
Disclaimer: I just wrote this messy article for 10 minutes... expect typo errors etc... If you don't like it then you have to option to ignore and leave this website. the BOTTOM line is you will learn how to compute your ROI. No BS.
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