12 May 2016 By PDSNET

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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