Definition of Return
What does the term "return" mean? What is meant by a "return"?
A "return" is the amount of profit that you make on an investment.
For instance - let's say that you invest $10,000 in shares of Microsoft. You end up buying 300 shares.
Two years later, you decide to sell your shares after an impressive run by the company. You end up selling your shares at double what you paid for them, meaning that your $10,000 turned into $20,000.
In this scenario, you would have booked a return of $10,000 ($20,000 - $10,000 original investment = $10,000 return).
Let's look at one more scenario.
You purchase an investment property for $175,000. You spend $25,000 renovating the house, bringing your total investment up to $200,000.
After finishing the renovations, you list the property for $250,000. You quickly find a buyer who is willing to pay full price, and the deal goes through without a hitch. After paying out expenses (real estate agent, other assorted fees), you end up receiving $240,000.
In this scenario, the total return on your investment was $40,000.
It's important to consider inflation when considering a return on an investment.
For instance - let's say that you purchase $200,000 in shares of a publicly traded company. You end up holding for 10 years and eventually sell, realizing a total profit of $10,000.
Now, inflation eroded the value of your $200,000 over the years, which made your $10,000 "return" a loss. If you had just stuck that $200,000 in the bank, you would have seen a much bigger return on your investment.
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