How to Calculate Rate of Return With Reinvestments
Most investors compare similar investments by looking at the rate of return. The rate of return is used as a measure of historical performance. A high rate of return suggests that the company will continue to be profitable in the future, while a low rate of return suggests that the company will perform poorly in the future. One challenge is determining the rate of return for investments when the return is reinvested back into making additional purchases of the same investment. Analysts use the cost basis to determine the rate of return for reinvested funds.
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Instructions
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1
Calculate the initial value of shares purchased. For example, if you purchase 1,000 shares at a cost of $1 each, the total price is $1,000 and the cost basis is $1.
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2
Determine the earnings made on the shares over the past year. Using the same example, if each stock (out of 1,000 total) pays a dividend of $.10 per share, at the end of the year this adds up to $100, which is then reinvested back into the company.
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3
Calculate the value of purchased shares. Based on the previous example, if the new shares were purchased at a discounted price of $0.50 per share, the $100 in dividends allowed you to purchase 200 additional shares of stock.
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4
Determine the new cost basis. The cost basis is the total value of shares divided by the number of shares held. In this example, the calculation is $1,100 divided by 1200, or $0.92.
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Calculate the rate of return (ROI) using the new cost basis. ROI is calculated by dividing the profit by the cost of the profit. In this case, the profit is $100 and the cost of the profit is $1,000. This means that the ROI is 10 percent, or $100 divided by $1,000 and then multiplied by 100.
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