The return on an investment consists of income plus capital gain expressed as an annualized percentage of the original investment. The income can take the form of a dividend (shares), interest (deposits with the bank), rental (property) or other income added to the increase. Some investments (like a fixed deposit with the bank) do not have a capital gain. For example, if you bought shares for 1000 cents, received a dividend of 25 cents and then sold them 6 months after the date of purchase for 1175 cents, then your return consists of 25 cents dividend plus 175 of capital growth, which is 20% of your original investment of 1000 cents. This is 40% on an annualised basis. However, you need to subtract the rate of inflation and the tax rate to arrive at your real after-tax return. And then you need to consider the risk in the investment. Risk is impossible to quantify so most people simply ignore it – but clearly, a low risk investment with a return of 10% is preferable to a high risk investment with the same return.

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