Probably you just get started with the stock market and just sold some of your stocks. The feelings can be overwhelming, especially if you were able to make a profit. But how do you know exactly how much profit you’ve made over your stock? That means selling your stocks for some profit is more than just feeling good – you need to know how much profit you have made exactly.
Knowing this will help you understand how much you have to spend, and how much money you owe in taxes. In this post, we will be taking a closer look into how to calculate stock profit so you don’t get into the bad book of the old Uncle Sam.
How Do You Calculate Stock Profit?
Calculating the profit made on stock investments is not as difficult as most people think. It is what even a beginner can do. What you need are two numbers so you can calculate the percentage gain from your stock investments. The two numbers are the original purchase price of the shares and the second is the price the shares were sold.
When you have these two numbers, here is the formula to use to calculate the percentage move of your stock holdings.
(Price sold – Purchase price)/(Purchase price) X 100% = Percentage move
Above is the formula to help you get everything sorted out. However, if this seems cumbersome to you, we will make some real-life examples to further help break things down.
Real-Life Example on How to Calculate Stock Profit
Let’s see an example of where the above formula was used to calculate the profit on a stock investment. Let’s say an investor owns 100 shares of Stock ABB and bought each share at the rate of $20 per share. If the investor sells all the 100 shares when the stock is trading at $23, it will be easy to say they have made a profit of $3 per share without any potential fees, taxes, or commissions.
Now, to know how much profit the investor really made on the sales of the 100 shares, let’s consider the formula.
(Price sold – Purchase price)/(Purchase price) X 100% = Percentage move
($23 — $20)/($20) X 100%
$3/$20 X 100%
0.15 X 100% = 15% gain.
Brokerage Fees and Commissions
This is another important thing to consider when calculating your net gain on a stock investment. At the time of purchasing the stocks, there may be some brokerage account fees or commissions that you might have paid. Even if you have forgotten about these payments, you need to factor them into your calculation because they can quickly turn a profitable trade into an unprofitable one. Depending on their size, brokerage fees and commissions do have effects on your investment’s profitability.
So, know what these fees are and subtract that sum from your profit to come up with your net gain.
You Should Also Understand How Capital Losses Work
Well, many people may think it is not necessary to take a capital loss since they are essentially a negative profit. But taking a closer look, you will see that capital losses could be an important tool to help investors manage their taxes. They can come in handy to help you offset some gains from the sale of other stocks, hence helping to beat down taxes.
For instance, if you sold Stock ABB for a profit of $15 and made a loss of $10 on another Stock CDD. That means the resulting taxable amount will now be $5. Although in this example, the total profit is more than the total loss, it could be otherwise in some cases. You can have the total losses to be greater than total gains. When this happens, you may be able to deduct excess capital losses against other income.
When Should You Consider Selling A Stock?
There may be several reasons an investor may decide to sell off their stocks and make some profits. It could be because of financial needs to meet other personal goals. And it could also be because the investor is retiring and wants to get their money out before things start liquidating.
Another reason could also be that the investor sees some potential profit in an asset and decided to sell it to make a quick gain. Selling stocks that have made significant gains could mean a lot to the portfolio of any investor.
You can also decide to sell a particular stock in other to buy other investments to bring a balance to your portfolio, aligning it with your goals, risk tolerance, and more. Many investors have made huge money trading stocks this way – they buy low and sell high.
Finally, investors could also decide to see a certain stock because they think buying such stock was a mistake in the first place. They may see it as one that is not fit for their portfolio or goes against their goals or risk tolerance. In such a situation, investors may decide to sell the stock even if it means making some losses.
Final Note
It is not enough to just sell your stocks at a price higher than the amount you bought them. You need to understand how to calculate the exact amount of profits made on your investment. Apart from helping you know how much to spend, it will also help you in terms of taxes. In this post, we have shown you a simple formula to calculate stock profit and why capital losses also matter. Thinking of calculating the profit on your stock investments, read the post again to know how to go about that.
