TLDR
- Stock profit is the calculation of how much profit you make when you sell a stock.
- When investing in stocks, you can make profits in two ways. The first type of earning is from capital appreciation and the second type of earning is from dividends.
- The point of calculating stock profit is to determine the cumulative return on investment. The formula to calculate stock profit is used to measure your overall return on investment regardless of the period over which you held a particular stock(s).
- When calculating stock profit, it is better to factor in all return elements to get the total return calculation. These elements will include dividends received (or interest in the case of bonds) and any fees associated with the investment such as trading fees or broker commissions.
- Spreadsheet tools like MS Excel and Google Sheets are known for being very helpful in making complex financial calculations and include many helpful tools in this regard. There is a simple way to create a spreadsheet for calculating the stock profit and a more advanced method. It’s advisable to get a grasp on both.
- The process of selling stocks to lock in the profit that they made due to a rise in prices. The prices when you bought those stocks for the first time are known as profit-taking. While profit-taking is a term that can be applied to a broad range of securities (e.g., stocks, bonds, mutual funds, etc.), it is primarily used in the context of stocks and equity indices.
- A stock profit-taking strategy is a plan of action wherein you know exactly when to sell your stock to gain an optimal amount of profit.
- One strategy to make a profit in stocks is to sell as soon as your potential gain reaches the range of 20-25%. Another profit-taking strategy is the 2% rule. This rule cautions you against risking more than 2% of whatever is available in your trading account on any given trade. Yet another profit-taking strategy is to sell half your shares when your share prices double your risk and sell the rest when the prices fluctuate to enable you to get to a profit target that you are aiming for.
What is Stock Profit?
Trading in stocks could prove to be a lucrative game that can be very profitable if one plays their cards right. Stock profit is the calculation of how much profit you make when you sell a stock. The process of selling stocks to lock in the profit that they made due to a rise in prices (i.e., the prices of the stocks when they first bought them) is known as profit-taking. While profit-taking is a term that can be applied to a broad range of securities (e.g., stocks, bonds, mutual funds, etc.), it is primarily used in the context of stocks and equity indices. When calculating the profit, investors need to remember to make an allocation for the broker’s fees.
When investing in stocks, you can make profits in two ways. The first type of earning is from capital appreciation and the second type of earning is from dividends.
Capital appreciation refers to an investor gaining profits when the share price of the stock which has been invested in goes up. While the total profits that you can gain from capital appreciation could go as high as 100%, the downside is that there is generally no hard and fast guarantee of capital appreciation. There is always a chance that the stock prices could dive. Established startups often provide their shareholders profits in the form of partial or full dividends. Startups are most commonly known to distribute partial profits to their shareholders (as opposed to total profits) while using the remaining earnings for other purposes like reinvesting in the startup for its expansion.
How to Calculate Stock Profit
The point of calculating stock profit is to determine the cumulative return on investment. The formula to calculate stock profit is used to measure your overall ROI regardless of how long you held a particular stock(s).
When calculating stock profit, it is better to factor in all return elements to get the total return calculation. These elements will include dividends received (or interest in the case of bonds) and any fees associated with the investment such as trading fees or broker commissions.
The following are the steps required to mathematically calculate Stock Profit
- First, calculate the costs of all the shares.
Costs = (Number of Shares x Share Purchase Price) + Commissions
- Next, calculate the total resale value of the stocks, called “proceeds.”
Proceeds = (Number of Shares x Share Sell Price) + Dividends Received - Commissions
- Calculating Stock Profit now becomes straightforward. Just subtract costs from proceeds.
Profits = Proceeds - Costs
- To calculate cumulative returns, use the following formula:
Cumulative Return = (Profit/Costs) x 100%
- To calculate annual returns, use the following formula:
Annualized Return = ((Proceeds/Costs) ^ (365/Days)-1) x 100%
This mathematical formula to calculate stock profit can be used by almost anybody. Although this formula is simple when the stock volume and value are low, using this formula becomes more complicated as the number of shares gets bigger.
If you own multiple stocks, then you can use the same formula as above to calculate the cumulative returns. However, that formula only works if the holding periods of all your positions are the same, which doesn’t generally happen.
If you are attempting to calculate your entire portfolio’s profits, you’ll need to factor in the position size. Your portfolio return also assumes that the position is simply held, as opposed to being bought and then sold. If you know the return of individual positions, then you can calculate the return of your stock portfolio using the following formula:
Portfolio Return = (*Position size of position 1 x return of position 1) + …….+ (position size of position n x return of position n)
As mentioned above, calculating the value and profits of stocks can become overwhelming as the number of stocks and the time period of investment keep increasing. It is better to use automation to calculate your stock profits instead of trying to do it manually.
Spreadsheet tools like MS Excel or Google Sheets are known for being very helpful in making complex financial calculations. There is a simple way to create a spreadsheet to calculate the stock profit and a more advanced method. It’s advisable to get a grasp on both methods.
Simple stock profit calculation using a spreadsheet
Figuring out your stock profit using MS Excel or Google Sheets is very simple and simplifies the calculation significantly. The process is similar to a manual approach. You need to define the necessary fields first. These fields will be:
- The number of shares
- Buy price
- Sell price
- Commissions paid
- Dividends received
Having defined the above fields, you can create simple formulas to calculate the costs, proceeds, and profit. You can also calculate the cumulative returns the same way.
Look at the following example for a better understanding:
An example stock profit calculation
An example stock profit calculation showing cumulative return
Advanced stock profit calculation using a spreadsheet
Advanced stock profit calculation can be made in MS Excel or Google Sheets in roughly the same manner as illustrated above with the addition of a few changes. The fields should remain the same except for the selling price, which should be replaced with the current price of the share. Doing so will help you in calculating the annualized return along with the cumulative return.
Entering the current price every day will be a difficult task. However, when implementing advanced stock profit calculation, you can use the GOOGLEFINANCE() function to find the current value of any stock that you want. The function looks as follows:
=GOOGLEFINANCE (stock symbol, “price”)
Find the specific symbol of the stock you are looking for, click on the cell where you need the value (in this case, its “current price”), and the value should be updated daily. The costs, proceeds, and profit will be calculated based on the value of the stock.
To calculate the annualized return, you need the total number of days you held the stock. You can manually enter the day on which you bought the stock in a row defined as “Purchase Date.” Then, define a row as “Current Date” and use the =TODAY() function to regularly update the date. After these two rows are done, you can define a row called “Days Held” and create a formula to calculate the total days you held the stock.
Now that you have set up all the necessary fields, you can create the “Annualized Return” field and implement the aforementioned formula for calculating the annualized return.
The following example should give you a visual understanding of what it would look like:
An example stock profit calculation using the Googlefinance command
An example stock profit calculation showing annualized return
The best thing about these spreadsheets is that you can keep adding to them as your portfolio expands. Your calculations become automated and at most, all you need to do to get the current stock profits and annualized returns is simply refresh the page.
Stock Profit Taking Strategy
Investing in stocks is a meticulous activity that requires deep thought and detailed research. A major mistake that people make is that when a stock starts to surge in value, they hold and wait too long before selling, hoping that the stock would increase further. They end up losing on the gains they could have made by waiting too long only to see the stock dropping in value.
A stock profit-taking strategy is a plan of action wherein you know exactly when to sell your stock to gain an optimal amount of profit.
One strategy to make a profit in stocks is to sell as soon as your potential gain reaches the range of 20-25%. This way, you gain from the stock while it is still on the rise. Aiming for this base value will make sure that you are able to gain sound returns.
The 20-25% rule is significant. It has been observed that many stocks tend to advance up to 20-25%, then they level off. After this, they tend to show a decline, while others start to show a rise. Therefore, 20-25% returns are oftentimes the best profit range to aim for as that range boosts the likelihood of sound returns. Once locking in on these gains, you can later invest them into other stocks which are just beginning to start their price run. While the returns earned with this strategy might not be the highest returns that you could have potentially made, they have a more reliable probability.
Now the question arises of how effective this 20-25% strategy is. There is a handy technique, known as the "Rule of 72," which can tell you how well a stock could do for you. Take the percentage gain of stock and divide 72 by this number. The value you get will tell you how many times you must reinvest in the stock to get 100% profit. When this rule is applied to the 20-25% range, we find out that if you reinvest your profits (of, say, 25%) in the same stock three times, you will be able to double your principal investment!
Another profit-taking strategy is the "2% Rule." This rule cautions you against risking more than 2% of whatever is available in your trading account on any given trade. Therefore, if you have $10,000 in your account, you shouldn’t risk more than $200 on a trade. And if you have risked $200 then you are expected to sell the moment you make a profit of $400. It’s a simple -- but powerful -- strategy where you end up making a profit even if you’re wrong half the time.
Another way to create a profit-making strategy is to sell half your shares when your share prices double your risk and sell the rest when they get to a profit target that you are aiming for. For example, let's say you buy 100 shares worth $100 and risk $2 per share. Therefore, your conservative profit target is $4. This means that the moment you make a profit of $4 per share, you sell half of your shares. In this case, that means 50 shares -- and you make a profit of $200. You sell The rest of the shares once the stock reaches a profit value that you have been aiming for. In this situation, you end up making a sure profit with half your shares, while the rest can be used to increase your gains further.
Summary
The field of stock trading has a notorious reputation for being tricky and difficult to navigate. Even seasoned traders can get swept away by greed and bad decisions and end up losing significant capital before finally quitting. Something that a trader should always be sure of is their goals when it comes to stock profit.
The above-mentioned formulas are easy to follow and can help you assess the profitability of the stocks you’ve invested in. If you have a basic understanding of using spreadsheets, then you can automate this process and get the relevant information instantaneously.
An exit strategy in stock trading is important as it helps you remain disciplined and makes sure that you avoid taking unnecessary risks. While the aforementioned stock profit-taking strategies are some of the more common ones, you can certainly design your own methods, strategies, and techniques based on your financial status and situation.
