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Here’s the deal: investors of all levels have to do some math every once in a while. If math isn’t your thing-don’t worry, anyone can do these simple calculations. You can get the info you need about your investments with some simple arithmetic.
Investors of all levels should know the basic math behind their investments. Even if you stick to automated investing, you should know how to calculate things like total returns and ROI.
Knowledge is power, and you should have all the power when it comes to your portfolio. Here are the investing calculations that you should know.
Need-To-Know Formulas for Stock Investors
If you have stake in the stock market, this is the quick math that you need to keep in your back pocket.
Return on Investment (ROI)
Measure the profits of any investment with the ROI formula.
ROI = (Net Return on Investment/ Cost of Investment) X 100%
If you need to know anything, it’s ROI. This is the basis to measure how your investments have performed. The formula above is the simplest way to calculate ROI, but this basic formula can be adjusted to factor in capital gains, commission, annual rates, and more.
Total Return
Use the total return formula to measure the actual rate of return of an investment or pool of investments.
Total return = [(Current Value – Cost Basis + Distributions) / Cost Basis] x 100
There is a lot of investing jargon packed into this formula. Let’s break it down.
The current value of the stock is the price that shares are listed whenever you decide to make your calculation. Your cost basis is the amount you paid for each share of the stock, and distributions are earnings that stockholders receive. Distributions are specific to every stock, and not all stocks give distributions.
Return on Equity
Use a Return on Equity to help decide what companies would be good investments.
Return on Equity = (Net Income – Preferred Dividend) / Average Shareholder’s Equity
Return on Equity (ROE) measures a company’s profitability and how efficiently it can generate profits. The higher a company’s ROE, the better it is at turning its equity financing into profits. A good value for ROE is typically between 15 and 20 percent.
Need-To-Know Formulas for Real Estate Investors
Knowing the math behind large-scale investments like real estate is paramount to your investing success, especially if you’re renting out your investment property.
Interested in real estate investment? These are the calculations you’ll be doing.
Net Operating Income
Net Operating Income measures the profitability of a real estate investment by comparing the operating cost and property revenue.
NOI = Revenue from Property – All Operating Expenses
A positive result from this formula would indicate that you are profiting from your investment. Alternatively, if you get a negative result that indicates that your property is costing more than it earns.
Capitalization Rate
Capitalization Rate, or Cap Rate measures the ratio of expected earnings from a property. There are several ways this can be measured, but we’re going to focus on the ratio of NOI to current market value and NOI to purchase price.
Cap Rate = Net Operating Income/ Current Market Value
Cap Rate = Net Operating Income/ Purchase Price
NOI/ market value is best used for an investment that has been in your portfolio for a significant amount of time, and NOI/ purchase price is best for newer real estate investments. Even better- you can also use both of these ratios in conjunction to see how your cap rate has changed over time in the market.
Cap rates will vary for different types of investment, but a god cap rate to be in is between 4 to 10 percent. However, your ideal cap rate depends on your portfolio, goals, and purchase price.
Rent to Cost Ratio
Use this formula to determine if it is cheaper to rent or own a property.
RTC Ratio = Median Home Price / Median Rent Price
Your own home is one of the best investments you can make. Buying a property will save you cash in the long run, but this formula will provide some extra clarity for your home investment.
Conclusion
No matter what type of investing you’re doing, you should know how to measure your success. Stay up to date on your portfolio and run the numbers often to make sure you’re staying on target and keeping your money safe.