Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Rate of return (RoR) is the loss or gain of an investment over a certain period, expressed as a percentage of the initial cost of the investment. A positive RoR means the position has made a profit, while a negative RoR means a loss. You will have a rate of return on any investment you make.
To calculate the rate of return for an investment, subtract the starting value of the investment from its final value (remember to include dividends and interest). Then, divide this amount by the starting value of the investment, and multiply that figure by 100. This will give you the RoR, expressed as a percentage.
A rate of return can give traders and investors key information for future trades or investments. The rate of return can be used by traders to evaluate the outcome of their trades. However, it is more commonly used as a long-term calculation by investors – to determine whether the cost of an investment is worth the potential profit or loss.
The calculations for the rate of return for shares and the rate of return for bonds are different because shares yield dividends, while bonds carry interest.
Let’s say that you own two ABC Limited shares, which you bought for $40 each. This would mean that your initial investment was worth $80.
Over the course of one year, ABC Limited pays out dividends of $2 per share – giving you a total of $4 – and the share price goes up to $50. This means that your total investment would be worth $104 (the value of the shares plus dividend payments). You would then subtract the original value of your investment ($80) from the new value ($104) and divide this by $80. To get your rate of return as a percentage, you would multiply this figure by 100. This gives an annual rate of return of 30%.
Alternatively, if you own a $100,000 bond with a 5% interest rate, which reaches maturity after four years, you will earn $5000 income every year (bond value multiplied by interest rate). If you sell the bond for $120,000 after one year, the appreciation – or growth – of the bond is $20,000 (subtract original bond value from new bond value).
The calculation of the rate of return is the interest plus appreciation, divided by original bond price – expressed as a percentage. The rate of return after one year is therefore 25% ($5000 plus $20,000, divided by $100,000, multiplied by 100).
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