Net return is the profit gained from an investment after subtracting costs, such as commission fees. Investors seek the highest net return, which is measured as a percentage of the investment. A 40% rate of return means the investor gained $16 from a $40 investment.
Net return refers to the total amount of return on an investment of any kind minus the amount of costs for that investment. In stock terms, it’s the amount of money you get from a stock sale above the price at which it was originally purchased, but also taking extraneous costs into account. The most common of these additional costs are commission costs, which are paid to broker-dealers to execute trades. Investors seek the highest possible net return on their investments.
Different investors have different goals when they put their money in the stock market. Some are willing to take big risks for the possibility of big gains, while others may be looking for the type of investments that provide 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. It measures the exact amount of profit from a specific investment in the stock market.
As an example, imagine that an investor buys a stock at a price of $36 US dollars (USD) per share. After the price skyrockets, he decides to sell the shares when they reach $56 per share. The commission costs paid to the stockbroker for the two trades total $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 commission costs of $4 USD. 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 large amount of money is placed in a single stock, then the investor may earn a high return that does not match his or her expectations for the stock. The rate of return, which is the net return measured as a percentage of the investment, is a good way to measure the positive impact of a single investment.
Using the example above, the return of $16 USD is measured against the total investment costs of the share 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 reached by dividing the net return of $16 USD by the total investment cost of $40 USD, which arrives at 0.4. That means the investor achieved a 40 percent rate of return on his investment.
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