How to calculate the rate of return on selling a stock?

Question

How to calculate the rate of return on selling a stock?

Answer 1

You probably want the Internal Rate of Return (IRR), see http://en.wikipedia.org/wiki/Internal_rate_of_return which is the compound interest rate that would produce your return.

You can compute it in a spreadsheet with XIRR(), I made an example: https://spreadsheets.google.com/ccc?key=0AvuTW2HtDQfYdEsxVlM0RFdrRk1QS1hoNURxZkVFN3c&hl=en

You can also use a financial calculator, or there are probably lots of web-based calculators such as the ones people have mentioned.

Answer 2

Simple math. Take the sale proceeds (after trade expenses) and divide by cost. Subtract 1, and this is your return. For example, buy at 80, sell at 100, 100/80 = 1.25, your return is 25%.

To annualize this return, multiply by 365 over the days you were in that stock. If the above stock were held for 3 months, you would have an annualized return of 100%.

There's an alternative way to annualize, in the same example above take the days invested and dive into 365, here you get 4. I suggested that 25% x 4 = 100%. Others will ask why I don't say 1.25^4 = 2.44 so the return is 144%/yr. (in other words, compound the return, 1.25x1.25x...) A single day trade, noon to noon the next day returning just 1%, would multiply to 365% over a year, ignoring the fact there are about 250 trading days. But 1.01^365 is 37.78 or a 3678% return. For long periods, the compounding makes sense of course, the 8%/yr I hope to see should double my money in 9 years, not 12, but taking the short term trades and compounding creates odd results of little value.

Answer 3

If annualized rate of return is what you are looking for, using a tool would make it a lot easier.

In the post I've also explained how to use the spreadsheet.

Hope this helps.