As a shareholder, you own a part of company, which entitles you to a potential profit on your investment. Calculation of Return on Investment (ROI) is the basic part to be understood therefor the definition can be rewritten to suit the situation relying upon what you add as returns and costs.
Let’s take an example:
A marketer takes the comparison of two products by dividing the gross financial gain that each product has made by its respective marketing expenses. On the other hand, a financial analyst would compare the same two products in an entirely different ROI calculation which can go by dividing the net income of an investment by the total worth of all resources that have been applied in the making and selling of the product.
In a broader term, ROI is:
“The profitability measure that estimates the performance of a business by dividing the net profit by net worth”
Making a return on your investment is subjected to on how well the company does - evaluated by its stock performance - and if the company pays a dividend. Capital appreciation (the stock price rising in value), and dividends are the two ways you can earn a return as a shareholder.
- Capital Appreciation
Capital appreciation is:
“Certain rise in the value of an asset based on the rise in the market price”
Buy a stock, and when the price escalates, sell the stock for a profit, or hold onto it and hope that it rises even further over an extended period of time. The amount you make on the stock when you sell it is your "capital gain" for tax purposes. You can calculate your percentage ROI by taking the sale price and subtracting the purchase price out of it. You can now divide that total by the purchase price, and then multiply the amount you receive by 100. What you are getting now is the percentage return on investment. If the stock price drops, you can sell or hold onto the investment and that’s your choice. But you will face a capital loss and a negative ROI.
“A portion of the company’s earnings distributed amongst its class of shareholders decided upon by the directors.”
Companies distribute a dividend in the form of a quarterly payment paid to shareholders for each share they own. This provides the investors a stream of income. In order to receive the dividend, you must have the shares of the company before the ex-dividend status, (The date at which the person has been confirmed by the company to receive the dividend payment). If you own 100 shares, and the company pays a Rs.10 dividend, you will receive Rs.1000 annually in dividend income.