What is Percentage Gain and How Does it Work?

Introduction

The primary objective of investing in the market is to make profits. Investors purchase stock from brokers or directly at a set purchase price, and when the time is right, they sell it to make a gain on their investment. This is the primary method of making gains from the market. The stocks may be held long-term or short term; it all really depends on the type of tax regime the investor is trying to follow.

Investment gains depend totally on the purchase and sale price; nothing else impacts the figure as much as these two values. Let’s understand % gains in a little more detail.

What is % Gain?

In order to understand percentage gain, it is first important to understand what gain is. Gain is defined as a rise in the value of an asset (like market securities) that you own. Say, for example, that you ought 50 shares worth $100 at the beginning of the month. By the end of the month, those shares were valued at $150 when you sold them. Since the price of the sale was higher than the price of purchase for an asset, it resulted in a gain. As opposed to losses that happen when the sale price is lower than the purchase price, gains are what make investors stay invested in the market.

Percentage gain, or % gain, is a value obtained from the purchase and sales prices of a stock by using a stipulated formula.

Why is Understanding Gain Important?

It is extremely important to understand how gain works in order to be able to make good investment decisions. The knowledge of calculating gain helps investors to measure the ROI of the money they put into stock. It also helps them compare their gains with respect to other investors’.

Say, for example, that investor A bought a stock for $10,000 and sold it one month later for a profit of $500. Investor B, on the other hand, bought the same stock (at some other point in time) for $8,000 and sold it later for a profit of $500. Here, while the profit that both investors made is the same at $500, the gains they made from selling that stock is different. While one investor paid a higher price for purchasing the same stock, the other investor gained more by purchasing it for lesser but selling it for the same price as investor A. Here, investor B gained $200 more.

Evaluating gains helps you understand how much returns your investment strategies are paying you.

Calculating Percentage Gain

Calculating the percentage gain from your investment is a straightforward mathematical operation. However, before you can calculate the percentage gain, you need to calculate gain first. The formula for calculating gain is as follows:

The resultant value you get is in currency units. Let’s understand this with an example.

Say that you purchase stock worth $700 at the beginning of January. After six months, when the market is doing well, you decide to sell the stock at its current value, at $950. By the numbers, you stand to make a gain on investment to the tune of:

The percentage gain is calculated as the difference between the selling price and purchase price, as a percentage with respect to the purchase price. Mathematically, the formula is expressed as:

Continuing with the example above,

Percentage gain helps investors to measure how lucrative investing in stock would be.

Gains and Taxes

Whatever gains your investment realizes is subject to Capital Gains taxes. The quantum of these taxes is dependent upon three distinct factors:

•    The term of the investment (short-term or long-term). Short-term capital gains are generally taxed at higher rates. On the other hand, long-term investments have a friendlier taxation curve
•    The type of asset to realize the gain – whether it is fixed income or market investment
•    Individual rate of income tax, in certain cases where gains get taxed as per income tax slab

With that said, gains can be offset against losses to help offset tax liabilities. Let’s understand that with an example. Say you invested in two market vehicles, with $10,000 and $8,000 respectively. While the first investment grew to $12,000 in six months, the second shrank to $7,500. Here, your net gain would be $2,000 - $500 = $1,500, that is, the net sum of all gains and losses. This is the figure that will be taxed.

Conclusion

Understanding gains and percentage gains is an important part of learning the world of investment. It helps you understand how much return on investment your money is generating with a stock, helping you make the most out of your money on the market. Click here to know everything about IPO.