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How to Calculate Profit and Loss in Investments?

Calculate profit and loss with ease!

Calculating profit and loss (P/L) in investments can be a daunting task, especially if numbers make your head spin faster than the Beyblade that one kid in your neighborhood used to have. That’s why we’re here — to help you understand it all!

First thing first

Let’s start with the basics. P/L in investments refers to the difference between the purchase price of an asset and its selling price. If the selling price is higher than the purchase price, you make a profit. If it’s lower, you make a loss. Simple, right? Well, not quite. There are a few things you need to keep in mind before you break out the calculators and start crunching numbers.

1. Dollar Value Method:

There are two ways in which you can calculate your P/L. The first method is called the Dollar Value method, which is by looking at how many bucks you managed to make (or lose).

The calculation is simple:

Profit or Loss = Sell price — investment cost

Say, two bros, Anthony and Beckham — Anthony invested \$1,000 in Stock XYZ, while Beckham invested \$10,000 in Stock FGH. After a month, Anthony sold stock XYZ for \$1,500, while Beckham sold Stock FGH for \$10,500.

If you’re taking the dollar value approach, both Anthony and Beckham performed the same, they both made \$500 from their investments. Cool, right? But is it appropriate to measure it like that?

Let’s put it this way, say, Beckham worked so hard — taking two to three jobs to earn that \$10,000 he put in his investments, and Anthony, well, he worked hard too, but perhaps not as hard — just enough to get himself \$1,000 to invest with. Both invested the money they worked so hard for, and in the end, they both made \$500.

If these two bros are investment managers, we’d put our money on Anthony. Why? Because if we use the second method, we can see that he actually performs better.

2. Percentages

Now, percentages. This will allow you to see actually how well these two bros are doing with their investments.

The calculation is still simple:

Percentage of Profit or Loss = Sell price — Investment cost / Investment cost x 100

Now, Anthony and Beckham, while Anthony invested \$1,000, Beckham invested \$10,000 — and both made \$500. We can use the calculation above to see why Anthony is a better (or luckier) investor here.

Anthony: 1,500–1,000 / 1,000 x 100 = 50%

Beckham: 10,500–10,000 / 10,000 x 100 = 5%

From the above, we can see how Beckham only made 5% profit from his investment while Anthony makes 50%.

Cost

First and foremost, you need to know the purchase price and selling price of the asset. This may seem obvious, but you’d be surprised how many people forget this crucial piece of information. Double-check your purchase and selling prices before you do anything else. Better on, keep records in excel files or any cloud system on the price of assets when you first bought them.

Next, you need to take into account any fees or commissions you paid. This could include brokerage fees, transaction fees, and any other charges associated with buying and selling the asset. These fees can eat into your profits (or increase your losses), so make sure you factor them in.

For example, you invested \$1,000 and paid \$10 in commissions and fees. After a month, you saw that you already made \$20 from said investment. A penny earned is a penny earned, right? Cash-out time!

As you try to withdraw your money, you paid \$5 in commissions and fees and another \$5 for withdrawal fees. You get that extra \$20 in your hands now… or do you? The whole expenses on fees and commission have gobbled up that \$20 you just made. The best you could say is that you waited a month to see your money staying the same.

Another thing that you might want to consider is the currency exchange rate. This can work to your benefit, or otherwise. Say, you’re staying in England, which uses GBP (£). Now, when you’re about to sell it, GBP is suddenly weaker. So, the profit you’re making will most likely be higher given the currency exchange rate at the time, and vice-versa.

2. Gains

Well, it’s not all gloomy with us. Of course, fees, commissions, inflation, and others are going to eat up your investment gains, but there are other things that may stack up on your gains as well — the most notable one is dividends!

Some stocks may grant you the ability to earn dividends from your investments. When you buy stocks, you can be said to have been a part-owner of the company whose stocks you bought. Some of these companies will eventually disburse some of their profits, which are known as dividends, to their owners.

You will then have to count these dividends in your income part of the calculation.

Bottom Line

• Profit and loss in investments refer to the difference between the purchase price and the selling price of an asset.
• Two methods to calculate profit and loss are Dollar Value Method and Percentages.
• Important factors to consider in the calculations are purchase and selling prices, fees and commissions, and currency exchange rates.
• Dividends earned from investments can also contribute to gains in investment income.

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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.

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Finance