Understanding Investment Profit

     The ultimate goal for an investor is to make a profit, however there are many different way to value that profit depending.  This article will look at different profit valuations money managers, firms and other investors use along with some of my preferred measuring values.  First we will go over some common terms.  These terms will not cover any investment fees, splits, dividends or other variables.

Profit ($ Value) - How much money you gained from your initial investment.  (Profit = Sell Value - Investment Value)

Return on investment (% Value) - A percentage of your return based on your initial investment compared to the current total for the sale of the stock.  (ROI = Profit / Investment * 100) 

Example:  You invest $500 dollars in a stock at $10.00 per share for 50 shares.  You sell the stock at $20.00.  Your profit is $500 because (($20 * 50) - $500 = $500).  Your return on investment was 100% because ($500 / $500 * 100 = 100%).

     This example is great because the investor doubled his money, however these values do not tell the whole story such as how long did he/she hold the stock.  To analyze this aspect we can use the terms and formulas below.

Profit per day ($ Value) - How much money you gained per day based on your initial investment.  (PPD = (Sell Value - Investment Value) / Days Invested).

Percent profit per day (% Value) - A percentage gain by day based on your initial investment compared to the current sale total.  (ROI = (Profit / Investment * 100) / Days Invested) 

Example 1: You invest $500 dollars in a stock at $10.00 per share for 50 shares and hold it for 30 days. You sell the stock at $20.00. Your profit per day is $16.66 because ((($20 * 50) - $500) / 30 = $16.66). Your return on investment was 3.33% because (($500 / $500 * 100) / 30 = 3.33%).  So your PPD is $16.66 and your PPPD is 3.33%.

Example 2: You invest $500 dollars in a stock at $10.00 per share for 50 shares and hold it for 300 days. You sell the stock at $20.00. Your profit per day is $1.66 because ((($20 * 50) - $500) / 300 = $16.66). Your return on investment was .33% because (($500 / $500 * 100) / 300 = .33%). So your PPD is $1.66 and your PPPD is .33%.

     This example demonstrates how using the length of your investment to measure your profit impacts your view on your investments's return rate.  This next example will demonstrate how using this knowledge of understanding investment profit can and should effect your investment strategy.  Please remember that investment fees and other variables are not taken into account, though they would have marginal impact.

Final Example:  Investor 1 invests $500 in a stock for one year and that stock value doubles resulting in a Profit of $500 and a ROI of 50%. Therefore, for the year, investor 1's investment profit is below.

Profit: $250      ROI: 50%     PPD: $.68    PPPD: .13%

Investor 2 invests $500 in a stock for one year and that stock value increases 10% in 31 days. His current investment profit for this stock is.

 

Profit: $50     ROI: 10%     PPD: $1.61    PPPD: .32%

 

Investor 2 takes his gains and invests $550 in a stock and that stock value increases 10% in 62 days. His current investment profit for this stock is.

   Profit: $55      ROI: 10%      PPD: $.87     PPPD: .16%

 

 

Investor 2 takes his gains again and invests $605 in a stock and that stock value increases 20% in 10 days. His current investment profit for this stock is.

 

Profit: $121         ROI: 20%     PPD: $12.10    PPPD: 2%

 

Investor 2 takes his gains again and invests $726 in a stock and that stock value increases 10% in 262 days. His current investment profit for this stock is.

Profit: $72.60        ROI: 10%    PPD: $.27      PPPD: .03%

 

 

     Let's analyze this example.  Investor 1 did extremely well. His stock increased by 50% resulting in a profit of $250 for a total of $750 at the end of the year.  Investor 2 did not his a big stock but managed to hit some small spikes with his/her biggest gain of 20% which resulted in his/her total profit of $298 for a total of $798 at the end of the year. 

 

 

     I show this example so that you the investor is aware of how your money can work for you in the market.  Often time investors are told to pick a stock and check on it every couple of weeks, months or even years.  It is advertised that over this time your return on invest is most likely going to increase and most investors are content with a 50% profit over a year however you should not be.  Understand PPD and PPPD and look at my 2013 portfolio to see how I used these profit calculations to maximize my returns throughout the year.