# Total Return Formula

Most investors usually have multiple options for investing their money. While the investors would like to maximize their investment return, they would also like to ensure that their investment is safe; they can get the principal amount invested back whenever they wish.

For many investments like stocks or mutual funds, the investment’s return consists of both the dividend, which the company declares, and its value increase. Hence, the Total Stock Return, or TSR, is the relevant parameter for evaluating stock market investments.

Total stock return definition

Total Stock Return measures the overall return of a stock, encompassing both the change in its price and any dividends received over a given period. It provides a comprehensive view of a stock’s performance, accounting for capital appreciation and income returns.

Total Stock Return is a concept that helps investors understand how much they have earned on a stock over a specific period. This return includes two components:

1. The change in the stock’s price.
2. Any dividends the investor received from the stock.

To understand this better, let’s use an example:

Imagine you bought a stock at the beginning of the year for \$100. By the end of the year, the stock price increased to \$110. Additionally, during the year, the company gave you a dividend of \$5 for holding the stock.

Your return from the price increase is \$10 (because the stock went from \$100 to \$110). And you also received \$5 in dividends. So, your Total Stock Return for the year is \$15, which is the combined return from both the price increase and the dividends.

By considering both these factors, the Total Stock Return provides a comprehensive view of how well a stock has performed over a given period.

## The total return calculation steps

• Determine the stock’s beginning price at the start of your observation period.
• Note the stock’s ending price at the end of the period.
• Account for any dividends received during this period.
• Subtract the beginning price from the sum of the ending price and dividends.
• Divide the result by the beginning price.

## Total return formula

The Total Stock Return (TSR) formula calculates the comprehensive return on a stock by accounting for both its price change and the dividends received. It’s determined by subtracting the beginning price from the sum of the ending price and dividends and then dividing this result by the beginning price.

The formula for the total return ratio is:

TSR= Total Stock Return = (Ending Price + Dividends – Beginning Price) / Beginning Price.

The first part is only looking at the increase in the stock price, while the second part is the declared dividend. While most investors prefer to calculate the TSR percentages for the various stocks before finalizing their investment, some investors may wish to use the cash TSR, which is defined as cash TSR = (P1-P0)+ D.

There is also an alternative way of calculating the TSR, combining the increase in stock value and a dividend yield.

TSR = Capital gains yield + Dividend yield for the stock

One of the reasons why TSR is necessary for an investor is that various stocks’ performance varies depending on the industry sector. For many of the high dividend yield stocks, the share prices will not increase significantly over some time due to low growth potential. In other cases, for a high-growth stock, no dividends may be declared, though the stock prices may increase faster. Hence, the investor should look at the overall picture and consider both the dividends received and the increase in the stock prices for calculating the TSR.

Typically, the investor should check the TSR of the company over several years to find out trends and also compare the TSR with other companies in the same sector. He can also compare the TSR with the benchmark indices for the related sector. This information will help the investor plan his finances and know what returns he can expect from the stock to invest in it. There may be some brokerage and other charges for purchasing the stocks, which are usually not considered for calculations.

## Conclusion

To calculate the Total Stock Return, determine the stock’s price at the beginning and end of your observation period. Next, take into account any dividends received during this time. Subtract the beginning price from the sum of the ending price and dividends. Finally, divide the result by the beginning price to get the Total Stock Return.

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Fxigor

Igor has been a trader since 2007. Currently, Igor works for several prop trading companies. He is an expert in financial niche, long-term trading, and weekly technical levels. The primary field of Igor's research is the application of machine learning in algorithmic trading. Education: Computer Engineering and Ph.D. in machine learning. Igor regularly publishes trading-related videos on the Fxigor Youtube channel. To contact Igor write on: igor@forex.in.rs

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