How to Find the Simple Rate of Return

The simple rate of return, also known as the nominal rate of return, measures an investment’s performance. It quantifies the net gain or loss an investment experienced over a specific period, expressed as a percentage of its initial cost. This metric offers a quick assessment of an investment’s profitability. It helps understand the financial outcome of an investment without complex adjustments.

Gathering Necessary Financial Information

Before calculating the simple rate of return, it is necessary to gather specific financial figures related to the investment.

The first piece of information needed is the initial investment, which represents the original amount of money committed to the investment. This includes the purchase price of an asset, any initial capital contributions, or the principal amount deposited. For stocks or bonds, this is the total cost to acquire them. For real estate, it includes the purchase price plus associated closing costs or initial renovation expenses.

The second figure is the final value of the investment, which is its current market value or the amount received if the investment was sold. This value reflects the investment’s worth at the end of the period being analyzed. For publicly traded assets like stocks, this can be found on brokerage statements or financial news platforms. For real estate, a professional appraisal or the actual sale price provides this figure.

The third component is any income generated by the investment during the holding period. This can encompass various forms, such as dividends from stocks, interest payments from bonds or savings accounts, or rental income from real estate. These income streams represent direct financial benefits received while owning the investment. Documentation such as brokerage statements, IRS Form 1099-DIV, Form 1099-INT, or property management records can provide these figures.

Calculating the Simple Rate of Return

Once the necessary financial information has been compiled, the simple rate of return can be calculated using a specific formula. The formula is: Simple Rate of Return = \[ ( (Final Value – Initial Investment) + Income Generated ) / Initial Investment ] \ 100%. This calculation determines the total monetary gain or loss from the investment relative to its initial cost. The result is then converted into a percentage for easier interpretation.

The first step in applying this formula is to calculate the capital gain or loss by subtracting the Initial Investment from the Final Value. For example, if a stock was bought for $100 and sold for $120, the capital gain is $20. This initial difference shows the change in the investment’s principal value.

Next, any Income Generated during the investment period is added to this capital gain or loss. If the stock in the previous example also paid $5 in dividends, the total gain would be $20 (capital gain) plus $5 (income), equaling $25. This step accounts for all forms of monetary benefits received from the investment.

The third step involves dividing this total gain by the Initial Investment. Using the example, $25 would be divided by $100, resulting in 0.25. This division provides the rate of return as a decimal.

Finally, to express this rate as a percentage, the decimal result is multiplied by 100. Continuing the example, 0.25 multiplied by 100 yields 25%. This final percentage represents the simple rate of return, indicating the investment’s overall percentage gain or loss over the analyzed period.

Real-World Examples of Simple Rate of Return

Applying the simple rate of return formula to various investment types helps illustrate its practical use.

Consider a stock investment where an investor purchased 100 shares of a company at $50 per share, totaling an Initial Investment of $5,000. Over two years, the stock paid $200 in dividends. The investor then sold all shares for $60 per share, resulting in a Final Value of $6,000. The capital gain is $6,000 – $5,000 = $1,000. Adding the $200 in dividends, the total gain is $1,200. Dividing this by the Initial Investment of $5,000 gives 0.24, resulting in a simple rate of return of 24%.

Another example involves a real estate property. An investor buys a rental property for $200,000. Over three years, the property generates $15,000 in net rental income after accounting for expenses like property taxes and maintenance. The investor then sells the property for $230,000. The capital gain is $230,000 – $200,000 = $30,000. Adding the $15,000 in net rental income, the total gain is $45,000. Dividing $45,000 by the $200,000 Initial Investment yields a 22.5% simple rate of return.

For a simpler investment, consider a savings account. An individual deposits $1,000. Over one year, the account earns $40 in interest. The Final Value of the account is $1,040. The capital gain is $1,040 – $1,000 = $40. Since the $40 in interest is already included in the Final Value, the total gain is $40. Dividing this by the $1,000 Initial Investment gives a 4% simple rate of return. These examples demonstrate how the formula consistently measures the profitability of diverse investments.