How to Calculate Stock Market Returns, Break Even Point and Basis Point


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Stock Market Returns Definition:

There are two types of returns expected from stocks that are stock appreciation return and dividend returns. Stocks market return is basically different between buying price and selling price is called as stock appreciation price and dividend return means when companies stocks are performing well then companies share their profits with shareholders in term either dividends or bonus. Let us take an example to understand how to calculate stock market returns:


Example of Stock Market Returns:

You buy 50 stocks of Infosys shares for Rs.2000/- (Around $30). In second quarter of the year, Infosys has paid dividend of Rs.50 per share and year later you sell Infosys stocks at Rs.2500/- (Around $38). What is the actual return earned from the stocks?

Let us evaluate:

Investment Amount = Rs.1,00,000/- (Rs.2000 * 50 shares)

Stock appreciation = Rs.500 per share (Selling price – Buying price)

Dividend Income = Rs.50 per share (Paid by the company to shareholders)

Total gain = Rs.550 per shares

Total gain percentage = 27.5%

Result: So overall you have gained Rs.27,500/- (27.5% return on investment) which includes 25000/- (Rs.500 * 50 Shares) as a stock appreciation returns and Rs.2500/- as a dividend income.


Wiki Finance pedia - Financial e-learning tutorial courses on Investing Wikipedia Chapter - Stock Market ReturnsBreak Even Point Definition:

In financial terms, “Break Even Point is that line of no profit no loss returns”. If you are investing in any assets there are various taxes and duties which increases your capital investments. When we call Break-even point which means minimum returns required on your investment in order to maintain no loss no profit condition.

There are mainly two factors which raise your break-even point of your returns:

  • Inflation Rate
  • Duties and Taxes

First and foremost thing which you need to do is find out the inflation rate and the income tax slabs of your country. Both this factors are necessary to calculate the break-even point of you investment returns.


Example of Break Even Point:

Let consider India’s inflation rate at 7% and effective tax rate at 30%. Formula for break-even point (In percentage) is: [(Inflation Rate / (100 – Income Tax Rate)) * 100]

Let us evaluate:

Considered, Inflation Rate = 7% and Income Tax Rate = 30%

When calculated:

= [(7 / (100-30)) * 100]

= 10%

Result: This means to maintain the purchasing power of the money with growing valuation, minimum returns of 10% need to be earned on investment to maintain your break-even point. Anything less than that would be considered as loss of money.


What is a Basis Point:

Basis point is also known as percentage point. Mostly all the financial calculations are either expressed in percentage (like profit, loss, etc) or either in percentage points (Interest rate, repo rate, etc). In financial terms 1 basis point is equal to 1/100 of percentage point or you can also say that 100 basis points are equal to 1 percentage point. Let us take an example to understand clearly:


Example of Basic Point:

One fine day, Reserve Bank of India declared hike in repo rate. Repo rate is increased from 6% to 9%. How many basis point repo rates are increased?

Let us evaluate:

Percentage Increase = 50 percentage [calculated as ((9-6) * 100 / 6)]

Percentage Point = 3 percentage points (which is 9% – 6%)

Basis point = 300 basis points (1 percentage point = 100 Basis points)

Result: When Reserve Bank of India increases repo rate by 300 basis points from current rate of 6% than it means that new repo rate will be 9% or can be also said as increase in 3 percentage point.

 

  

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