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A year ago you paid USD 50 for one share. Today that same share is worth 48. On the price alone you are down 2. But during the year the share paid you 3 in cash, and that cash is already yours. So the price moved against you, and you still finished the year ahead of where you started. One number can carry both of those movements at once. This lesson builds that number and puts it to work on this share.
Start with where the money actually comes from. An asset normally pays you in two ways. The first is the change in its price between the day the investment is made and a later valuation date. Measured against what you paid, that change is called the price return, or the capital appreciation return. This share went from 50 to 48, so the change is negative 2 against a starting price of 50. That is a price return of negative 4%.
The second way is cash the asset hands over while you hold it. On a share that is a dividend. On a bond it is an interest payment. Measured against the same price you paid, that cash is called the capital distribution return. Here the 3 in cash against the 50 you paid is a capital distribution return of positive 6%. Both ratios have the same quantity underneath them. Every return in this lesson is measured against the price paid at the start.
Now put the two together. That sum is the total return, and it answers the question this lesson opened with. Negative 4% from the price plus positive 6% from the income gives positive 2%. The year was a gain of 2%, even though the price fell.
The board shows that same year as one picture. The 50 you paid sits at the left, the 48 it ended at sits at the right, and the 3 of cash arrives in between. The price piece pulls 4% down, the income piece adds 6%, and the two together leave 2% standing.
Because both pieces are measured against the same starting price, the whole thing can also be written as a single fraction. Ending price minus starting price plus income, all over the starting price. Here that is 48 minus 50 plus 3, which comes to 1, over 50. One over 50 is 2%.
One choice decides whether any of this comes out right. The number underneath is the price you paid at the start. The ending price never goes underneath. Divide by 48 instead of 50 and the answer changes, and what you get is no longer the return on the money you actually put in. Measured over a single period, this number is also called the holding period return, and that period can be a day, a month, a quarter, or a year.