Knowing how to calculate stocks profit is important. Accurate stock profit calculation lets you know your gains or losses. Although it seems pretty simple because most traders, especially beginners, think that it involves a simple calculation. According to them, subtracting net selling proceeds from net buying gives you stocks profit or loss. However, it isn’t that simple.
The accurate stock profit calculation involves more than just buying and selling. Firstly, you need to know the cumulative return on your investment. Secondly, commissions of the broker and trading costs also go into the equation. Thirdly, how you need to include all factors into the equation. So you see, stock profit calculation isn’t that simple. That said, we are sure you need help, especially if you are a new player in the stock market.
In our today’s guide on how to calculate stocks profit, we are going to illustrate the easy way to calculate stocks profit. Our detailed guide also includes how to gain profit in stock trading. So, this post is going to help you a lot. Therefore, keep reading to know how to calculate stocks profit with precision.
What is stock profit?
Before understanding how to calculate stock profit, it is better to understand what actual stock profit is. So, what stock profit is in your opinion? Is it just a simple equation involving subtraction? Or, are there other factors that must be part of the equation? Let’s see what it turns out to be.
Stock profit means your gains when you sell stocks. Moreover, it is obvious that you can make a profit only when you buy stocks at a low price and sell at a high price. Otherwise, you will not be able to take profit (the act of selling stocks when the price rises). Instead, you will be incurring losses because you bought when prices were high and sold when prices were low.
Furthermore, it is also important to know what “stock profit” includes. Stock profit includes two factors – capital appreciation or rise in stock price and dividends. In other words, you make a profit on stocks in two ways. Firstly, you make a profit when stock prices rise after your investment. Secondly, you also make gains when you earn dividends on stocks. So, your stock profit includes capital appreciation and dividends. Now, let’s move to the main question – how to calculate stocks profit?
How to calculate stock profit?
As we discussed a short while ago, stocks profit includes capital appreciation as well as dividends. Therefore, we must determine cumulative gains made on stocks. It is necessary for the exact and accurate stock profit calculation. If you don’t include dividends then you cannot make the whole picture clear. Moreover, the costs of trading or investing in stocks also are part of the calculation. Why so? Because we need to factor in all elements that play a role in deciding how much you gain from stocks. So, how to calculate stocks profit?
The accurate stocks profit calculation consists of the following steps.
1. Firstly, determine the cost of all stocks including broker’s commission using the formula;
Costs = (Total number of shares × Share purchase price) + Broker’s commission
2. Secondly, determine the proceeds or the total amount received from selling stocks using the formula;
Proceeds = (Total number of shares × Share sell price) – Broker’s commission
3. Thirdly, determine the dividends received during the period you held shares
4. Fourthly, determine net proceeds using the formula;
Net proceeds = Proceeds + Dividends
5. Now, it’s time to calculate stocks profit using the following formula;
Stocks profit = Net proceeds – Costs
6. Finally, calculate the cumulative return on your investment using the formula;
Cumulative returns = (Stocks profit ÷ Costs) × 100
These are the steps to calculate stocks profit with ease and accuracy. Moreover, almost anyone who needs to calculate stocks profit can use this method. It is a very simple but the most effective method. However, it is important to note that it is easy when values are low. When values are, you need to be more careful.
Furthermore, you can use this method to calculate the profit of multiple stocks. Similarly, you can use the method to calculate cumulative returns on multiple stocks. However, the holding period of multiple stocks must be the same which is very unlikely. Therefore, you must calculate the stock’s profit of each stock separately.
Tools to calculate stocks profit
It is also important to know about tools to calculate stocks profit when you are after knowing how to calculate stocks profit. It is easy to calculate stocks profit when you have limited stocks or have limited positions such as having stocks in two or three companies. That is usually the case of beginners or individual traders with limited capital. However, big traders with numerous positions cannot calculate stocks profit manually. Therefore, they need tools to help them in this quest. The easiest tools to use are;
- Online stocks profit calculators
1. Online stocks profit calculators
There are very useful stocks profit calculators you can easily find over the internet. These tools are extremely handy for both beginners and more seasoned traders.
Online stocks profit calculators also use the same values we discussed earlier. They require you to have stock buying price, broker’s commission when buying stocks, stock selling price, and broker’s commission when selling stocks. You can use these parameters to calculate how much money you made from a stock transaction. Typically, stock profit calculators simply require you to input values in the following simple steps;
- Firstly, enter the total number of shares
- Secondly, the broker’s commission
- Thirdly, stocks selling price
- Fourthly, broker’s commission when selling stocks
Moreover, these calculators also enable you to calculate return on investment, percentage gains, and break-even sales price.
You can also use tools like Microsoft Office Excel and Google Sheets to calculate stock profit. In fact, these tools significantly simplify the process and save a lot of your time and effort.
Spreadsheets require you to define the required input fields irrespective of which tool you are using. The fields are;
- Total number of shares
- Buying price
- Selling price
- Broker’s commission
- Dividends received
After defining fields, you can use the “formulas” feature to calculate stocks profit and cumulative returns.
How to be a profitable stocks trader?
It is clear now that it isn’t difficult at all to understand how to calculate stocks profit. The process involves simple calculations but with all the parameters playing a role in determining your overall profit.
But the main thing in the trading before profit calculation stage is – how to get profits in stock trading and how to be a profitable stock trader. There are two simple ways to do it – buy low and sell high or buy high and sell higher. There is no other way to make gains. If you don’t do it, you’ll have to bear losses.
Buy low and sell high – This strategy involves buying stocks at a low price and selling at a high price. For example, you buy stocks of a company at $25 per share. Now, you need to sell stocks at a high price. If you sell stocks at $30, it means you made a $5 profit on each share.
Buy high and sell higher – This is the strategy that is hardly discussed. However, you can still use it to make a profit. It becomes useful when stocks of a company are in the breakout phase. For example, you buy shares of a company after a breakout at $ 35 per share and go all the way up to sell at $40 per share. So, you made a $5 profit on each share.
How to ensure profitability when trading stocks?
As we know, making profits on stocks involves simple strategies – buy low and sell high or buy high and sell higher. Then, why do most traders fail to make gains and find themselves at the wrong end? The answer is – they make impulsive trading decisions without conducting research.
Trading isn’t as simple as most people think. It is a meticulous activity that requires a lot of research, strategies, and planning. Most traders wait and hold stocks for too long when a stock begins to surge. They hope that the price will go further high. They end up losing profit they could have earned by selling stocks at high. That means, their emotions get the better of them. However, stock markets don’t work that way. They don’t care about what you want or think. It is you who needs to pay attention to what the market says. That’s the only way.
If you have a proper strategy and plan, you don’t make such mistakes. Although it is true no one can ever know how low or high a stock will go, it is always better to stick to a plan. The plan is that you should know when you need to sell stocks to book profit. You can do this by setting a range of your potential gains. For example, you can choose a 20-25% range. That means, your plan is to sell stocks as soon as the price rises by 20 to 25%.
Furthermore, you can expand your trading rules as much as you want to ensure profitability. Although the 20-25% rule is a good one, you can further expand your plan. For example, you can decide to sell half of your shares when prices rise by 12.5% and another half when it reaches the 20-25% range. That means you can maximize your gains while minimizing risks. In other words, you use half of your shares for making a sure profit while using the other half to further your gains.
How to calculate stocks profit – the wrap-up
Knowing how to calculate stocks profit is important to track trading performance. It helps you understand how much you gained after selling stocks. The stock profit calculation involves all the factors that play a part in determining your net gains. In other words, you have to include the broker’s commission and dividends to calculate accurate stocks profit.
Stock profit calculation is a straightforward process that involves a simple equation. However, you need to determine all factors carefully. Fortunately, there are certain tools you can use. Online stocks profit calculators and spreadsheets help you easily calculate stocks profit. However, it is more important to know how to achieve profits before knowing how to calculate stocks profit. You cannot go to the second step before the first step. That said, you need to develop a trading plan that directs you when to sell stocks. Otherwise, you will end up losing gains you could have made. Moreover, you can expand your plan as much as you want to maximize gains while managing your risk. That is the only way to be a successful and profitable trader who deserves to know how to calculate stocks profit.