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# Calculating Growth Rates of your Stocks: Simple Return Formula for Finding Annual Growth in Stock Investments

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## What is the Simple Return Formula?

The simple return formula is a basic mathematical formula which any investor can use to determine their return on investment. Basically, all you need for the formula is the original purchase price of the stock, known as the Cost Basis, the selling price of the stock, known as the proceeds (or total proceeds, and then any dividend payments that might have been distributed to you (your share of the company's profits, generally paid quarterly).

Now the formula and example below are pretty basic and don't account for stock splits, brokerage fees, or taxes upon withdrawal, but I think it provides a good template for figuring out your own Return on Investment (ROI) for your stock portfolio. Hopefully you will apply this knowledge to your own trading portfolio or retirement account (410K, 403B, Simple IRA, or ROTH IRA) to see how your gains compare to major indexes such as the S&P or DOW.

## The Formula for Simple Return of a stock and an Example of the Simple Return Formula

Simple Return Formula:

Simple Return = (Total Proceeds + Dividends) / (Cost Basis for Stock) – 1

Real Life Example of Simple Return Formula:

Lets say you bought Coca-Cola stock (KO) at its closing price of $63.92 on February 1, 2011. For your $10,000 investment, Coca-Cola gave you 156.44 shares ($10,000/$63.92). You hold onto your shares for a little while, slowly watching the stock price rise over time and also collecting dividends quarterly. Then on March 1, 2012, you decide to sell your entire position in the stock at the close for $69.86 per share, or a total of $10,928.89.

So, In order to determine the Simple Return Formula all you need is the dividends paid (since you already have the Total Proceeds of $10,928.89, and the Cost Basis of $10,000. Simply, add up the dividends and plug into the formula to get the simple return for your KO stock purchase. For the purpose of this example we will assume that the dividends were not reinvested (also, you may notice that we have not included a brokerage fee to buy or sell our Coca-Cola Investment.. this is just to simplify things, but you can easily include this in the Simple Return Formula by subtracting the premium paid to place the trade from the Total Proceeds).

Dividends Paid:

March 11, 2011: $0.47 dividend * 156.44 shares = $73.53

June 13, 2011: $0.47 dividend * 156.44 shares = $73.53

September 13, 2011: $0.47 dividend * 156.44 shares = $73.53

November 29, 2011: $0.47 dividend * 156.44 shares = $73.53

**TOTAL DIVIDENDS PAID: $294.12**

Simple Return = ($10,928.89+$294.12) / ($10,000)-1

Simple Return = ($11,223.01 / $10,000) – 1

Simple Return = (1.122301) – 1

Simple Return = .1222301 or 12.23%

## How do you figure out the annual growth of your stock investment

So, between February 1, 2011 and March 1, 2012 your Coca-Cola Investment made a profit of 12% before taxes (and not including fees)… This is great information to have but you might be wondering what your annualized return would be (since you owned the investment for over a year you don’t know what the average yearly return on investment is…). Now, this is a fairly simple example since you only held the stock for 13 months, but the formula below can apply to any number of months or years that you hold a stock. This formula is also know as the Compound Annual Growth Rate (CAGR)

## CAGR Formula

## Annual Growth Example

So, if we take the data from the Coca-Cola Example above we simply fill in the formula above with the only amendment to the formula being we are multiplying by months instead of years... but that can be solve with an easy substitution of using months instead of years and than annualizing it:

((ending value/beginning value)^(1/(months-1)))-1

((11223.01)/10000)^(1/13-1))) - 1 = .97

(1 + .97)^(12) - 1 = 12.23%

So, your gross profit annualized will be a healthy 12.23% if you had invested in coca-cola on Feb 1, 2011 and held for 13 months.

**If you are not interested in doing the math yourself you should try the CAGR Calculator at the Investing Answers website. However, this will only account for the gains on the initial investment and won't include any reinvesed dividends (if you check the picture below you will see the discrepancy in growth when the dividends are not accounted for...)**

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