Definition of Return

Return is the profit or loss on an investment over a given period. Returns can be measured in absolute terms, as money earned or lost, or as a percentage, as a rate of return or an annual rate of return. The rate of return is calculated by dividing the net profit by the initial investment amount and multiplying by 100 to obtain the percentage. The annual rate of return measures the average return earned over several years or investment periods. It takes into account compounding, inflation, and other factors that may affect the total amount earned on an investment over time.

Returns apply to stocks, bonds, mutual funds and real estate investments.

What is Returns

The return or financial return is the money made or lost on an investment over time. 

The return can be expressed nominally as the change in the dollar value of the investment over time. Return can also be defined as a percentage derived from the profit/investment ratio. Returns 

can also be presented as net performance (after fees, taxes and inflation) or gross return, which does not take into account anything other than the change in price. It even includes your pension plan.

Understanding Returns

Prudent investors know that the exact definition of return is situation-specific and depends on the financial inputs used to measure it. An omnibus term such as profit can mean gross, operating, net, before or after taxes. A generic term such as investment can mean selected, average or total assets. 

Holding period return is the return on an investment over the time an investor holds it. The holding period return may be expressed nominally or as a percentage. When expressed as a percentage, the commonly used term is the rate of return (RoR). 

For example, the return earned over the periodic interval of one month is a monthly return, and the return over one year is an annual return. Often people are interested in the annualized return on investment (annualized), which calculates the price change from today to that of the same date one year ago. 

Returns for periodic intervals of different lengths can only be compared when converted to intervals of the same length. It is common to compare returns earned during one-year breaks. Converting shorter or longer return intervals into annual returns is called annualizing.

Nominal Return 

Nominal return is the net gain or loss on an investment expressed in cash dollars (or other applicable currency) before any adjustments for taxes, fees, dividends, inflation or any other impact on the amount. It can be calculated by calculating the change in the value of the investment over a given period plus any distributions less any expenses. Distributions received from an investor depend on the type of investment or venture, but may include dividends, interest, rents, rights, benefits or other cash flows received from an investor. Expenses paid by an investor depend on the type of investment or venture but may include taxes, costs, fees or expenses paid by an investor to acquire, maintain and sell an asset.

Real Return 

The real rate of return is adjusted for price changes due to inflation or other external factors. This method expresses the nominal rate of return in real terms, which holds the purchasing power of a given level of capital constant over time. Adjusting the nominal rate of return to compensate for factors such as inflation allows you to determine how much of your small return is real. Knowing the real rate of return on an investment is very important before you invest your money. This is because inflation can reduce value over time, just as taxes also reduce value. 

The following words from the dictionary

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