Net return is the total return on an investment minus costs, including commission costs. Investors seek the highest net return, which is measured as a percentage of the investment. Different investors have different goals, but all want the highest possible return. An example shows a net return of $16 USD with a 40% return rate.
Net return refers to the total amount of return on an investment of any kind less the amount of costs for that investment. In terms of shares, it is the amount of money made from a sale of shares relative to the price at which it was originally purchased, also accounting for extraneous costs. The most common of these additional costs are commission costs, which are paid to stockbrokers for executing trades. Investors seek the highest possible net return from their investments.
Different investors have different goals when placing their money in the stock market. Some are willing to take big risks for the possibility of huge returns, while others may be looking for the type of investment that provides long-term stability. But ultimately all investors want the highest possible return on their investments, which is why net return is such an important measure. Measure the exact amount of return from a specific investment in the stock market.
For example, imagine an investor buys a share at a price of $36 US dollars (USD) per share. After the price skyrockets, he decides to sell the stock when it reaches $56 USD per share. The commission costs paid to the stock broker for the two trades amount to $4 USD. In this case, the net return is the price at which the stock is sold, or $56 USD, minus the sum of the price at which it was purchased, or $36 USD, and the $4 USD commission cost. These calculations lead to a return of $16 USD.
This concept is even more useful when judged in terms of how much capital was included in the investment. If a lot of money is invested in a single stock, the investor could get a high return that does not quite match his expectations for the stock. The rate of return, which is the net return measured as a percentage of your investment, is a good way to measure the positive impact of an individual investment.
Using the example above, the return of $16 USD is measured against the total investment costs of the stock purchase price of $36 USD and commission costs of $4 USD. Adding these two amounts produces a sum of $40 USD. The rate of return is obtained by dividing the net return of $16 USD by the total investment cost of $40 USD, which comes to 0.4. This means that the investor has managed a 40% return rate on his investment.
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