Once you start investing, an important metric to keep track of is your investment gains. Most people are able to purchase shares of a stock, bitcoin, ETF or mutual fund through a work retirement plan.
For these people, the work place makes a great starting point because of the lure of a company match.
If you don’t have access to a retirement plan at work, that does not mean you are SOL.
There is always the option of using a traditional/Roth IRA or a brokerage account to build wealth.
What Is the Percentage Gain or Loss on An Investment?
To calculate the percentage gain on an investment, you must first determine the original cost of the investment. This is also known as the purchase price.
The investment gain or loss is then determined by subtracting the purchase price from the sell price of the investment.
Let’s use my GME debacle as an example. I was silly and bought into the Gamestop hype at the start of the year. Yep, I actually and used my hard earned dollars to purchase shares when they were selling at $280 a pop.
A short one day later, the share price dropped to $90. Had I sold my share then, my investment loss would have been $190. That is an investment loss of 67.8%. YIKES.
Formula for Calculating Investment Percentage
Understanding your return on your investment is actually pretty straight-forward.
First, subtract the original purchasing price from the sale price. Next, divide that number by the investment’s original price. Finally, multiply the result by 100 to get the investment’s percentage change.
Investment percentage gain = Purchase price – Price sold / Purchase price × 100
If the percentage is positive that means that the current market value was higher than the initial purchasing price. This means a financial win for you…if you sell!
What Are Unrealized Gains?
Technically, an investment gain is not actually yours until you sell off those funds. Prior to that, the result will be considered an unrealized gain (or loss).
When your investment is sold for a profit, then that profit is considered realized. If an unrealized gain is not sold in a timely manner, the future profit may be lost. For instance, think back to those investors who should have dumped their shares of Blockbusters back in the Early 90s but waited and did not sell until the 2000s.
How to Calculate the Cost Per Share After A Stock Split
There is one more thing to consider when it comes to owning shares of an investment, specifically a stock. Sometimes stocks can have a “stock split”. This essentially is when outstanding shares of a company are divided into a fixed number of shares.
A stock split operates like this. Let’s say a company, ACAB Inc, has shares with a face value $100. They then decide to do a 2:1 split.
After the stock split, an individual who owned 500 shares in the company will now own 1,000 shares.
If you buy a stock that splits, the number of shares you own will increase after the break. The price per share, on the other hand, decreases. This is attributed to the fact that the market capitalization remains unchanged.
In principle, a split could increase the number of shareholders by allowing more investors to purchase shares at lower rates.
Why Your Investments Gains/Losses Matter
Understanding your investment gains and loss is important as you track your progress towards financial independence. It allows you to know which companies are doing well and which ones you should probably ditch.
For me, I love to invest in low cost index funds that track the market. This is because historically, these types of funds tend to trend up.
Investing in individual stocks could lead you to the moon, think early investors of Tesla. However, putting all your eggs in one basket can also be detrimental (i.e. Myspace, Napster, etc.).
Always consider you risk tolerance when investing and always keep track of your gains and losses.