After you sell your shares of a stock, you want to figure the annual rate of return based on your investment and sales price. However, you also need to consider the dividends the stock paid to get an accurate picture of how well you did. If you held the stock for a period longer or shorter than one year, you have to annualize the rate of return to compare how well these investments performed relative to other investments that you held for a different time period.
1. Add the amount, if any, of dividends received from the stock while you owned it to the selling price of the stock to find the total return. For example, if you received $50 in dividends and you sold the stock for $4,570, add $50 to $4,570 to find your total returns to be $4,620.
2. Divide the total returns by the purchase price to calculate the ratio of the returns to purchase price. In this example, if you paid $4,220, divide $4,620 by $4,220 to get 1.09478672985782.
3. Divide 1 by the number of years you held the stock. For example, if you held the stock for 1.6 years, divide 1 by 1.6 to get 0.625.
4. Raise the total return to purchase price ratio to the power of Step 3. "Power" means using exponents. On a calculator, enter the ratio, push the exponent key, enter the Step 3 result and push equals. In this example, raise 0.625 to get 1.0582.
5. Subtract 1 from the result and multiply by 100 to find the annual rate of return. Completing this example, subtract 1 from 1.0582 to get 0.0582 and multiply by 100 to find the average annual rate of return equals 5.82 percent.
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