How to Calculate How Much Money You Make From Stocks

Calculating how much money you make from stocks involves understanding several key components: capital gains, dividends, and the time value of money. This guide will walk you through the process, explain the formulas, and provide a calculator to make the calculations quick and easy.

How to Calculate Stock Earnings

The total money you make from stocks comes from two primary sources: capital gains and dividends. Capital gains are the profits you realize when you sell stocks at a higher price than you bought them. Dividends are regular payments made by companies to their shareholders.

Total Stock Earnings = Capital Gains + Dividends

To calculate your total earnings, you'll need to know the purchase price, sale price, number of shares, and any dividends received. The time value of money also plays a role, as money earned later is worth less than money earned today due to inflation and interest rates.

Key Components of Stock Returns

Capital Gains

Capital gains are calculated by subtracting the purchase price from the sale price of the stock. The formula is:

Capital Gains = (Sale Price - Purchase Price) × Number of Shares

There are two types of capital gains: short-term and long-term. Short-term capital gains apply to stocks held for one year or less, while long-term capital gains apply to stocks held for more than one year. The tax treatment differs for each type.

Dividends

Dividends are payments made by companies to shareholders. The total dividends received can be calculated by multiplying the number of shares by the dividend per share and the number of dividend payments received.

Total Dividends = Number of Shares × Dividend per Share × Number of Dividend Payments

Dividends can be paid quarterly, annually, or at other intervals. It's important to account for all dividend payments received during the holding period.

Time Value of Money

The time value of money accounts for the fact that money earned later is worth less than money earned today. This is accounted for by discounting future cash flows to their present value.

Present Value = Future Value / (1 + Discount Rate)^Number of Years

The discount rate typically reflects the risk-free rate of return or the required rate of return for the investment.

Step-by-Step Calculation

Determine the purchase price and sale price of the stock.
Calculate the capital gains using the formula provided.
Identify all dividend payments received during the holding period.
Calculate the total dividends using the formula provided.
Sum the capital gains and total dividends to get the total stock earnings.
Adjust for the time value of money if comparing earnings over different time periods.

Remember to account for any brokerage fees, taxes, and other transaction costs when calculating your total earnings.

Worked Example

Let's say you bought 100 shares of a stock at $50 per share and sold them at $75 per share. You also received $2 per share in dividends quarterly for two years.

Capital Gains = (75 - 50) × 100 = $2,500 Total Dividends = 100 × $2 × 4 = $800 Total Earnings = $2,500 + $800 = $3,300

In this example, your total earnings from the stock are $3,300.

Frequently Asked Questions

How do I calculate capital gains from stocks?: Capital gains are calculated by subtracting the purchase price from the sale price and multiplying by the number of shares.
What are the different types of capital gains?: There are short-term capital gains (held for one year or less) and long-term capital gains (held for more than one year).
How do I calculate total dividends received?: Multiply the number of shares by the dividend per share and the number of dividend payments received.
Why does the time value of money matter in stock calculations?: The time value of money accounts for the fact that money earned later is worth less than money earned today due to inflation and interest rates.
What other costs should I consider when calculating stock earnings?: Brokerage fees, taxes, and other transaction costs should be accounted for in your total earnings calculation.