Lessons in computing returns – IV Returns from shares.

Hi there,

In the case of shares, there are two types of returns you expect –

  • Dividends
  • Capital appreciation

How would you compute returns in such cases? let’s discuss with two examples.

Example 1

You invest in 1000 shares of AB Ltd for Rs 100,000 a year back.  At the year end, the shares are quoted at Rs 150 and the company also pays you a dividend of Rs 2 per share. That is, you get Rs 2000 as dividend, and at the same time, you investment is now Rs 150,000. You sell the share.

How would you compute your overall return from this investment?

The gain you made is as follows –

  • Appreciation in market price – Rs 50
  • Dividend received – Rs 2
  • Total gain – Rs 52
  • Return = Rs 52 / Rs 100 = 52%

Example 2

You invest in 1000 shares of AB Ltd for Rs 100,000. You hold on to it for 3 years. The dividends paid during these 3 years are follows- Rs 2, Rs 2.50 and Rs 3. The market prices at the end of each year are – Rs 90, Rs 95 and Rs 110.

How would you compute your yearly return from this investment?

  • The cost per share at the point of investment was Rs 100
  • Fist year return would be – fall in market price Rs 10, dividend paid Rs 2
  • Therefore, net loss = Rs 8
  • Return = -8 / 100 * 100 = loss of 8%

Second year

  • The cost of share at the end of first year = Rs 90
  • Year end price = Rs 95 , dividend paid = Rs 2.50
  • Therefore , net gain = Rs 7.50 ( 95-90 + 2.50)
  • Return = 7.50 / 90 * 100 = 8.33%

Third year

  • The cost of share at the end of second year = Rs 95
  • Year end price = Rs 110 , dividend paid = Rs 3
  • Therefore , net gain = Rs 18 ( Rs 110-95 + 3)
  • Return = Rs 18/ 95 * 100 = 18.94%

Overall return from investment would be = (-8%) + 8.33% + 18.94% = 19.27%

So, while computing yearly returns from investment, you should consider capital appreciation or depreciation (although it’s notional) and also the dividends received.

Bye for now,

Have a nice day !!

You may like these posts:

  1. Lessons in computing returns – II Simple returns
  2. Lessons in computing returns – III Compounded returns.
  3. Lessons in computing returns – I Percentages

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