How to Calculate Annual Return

by Carter McBride

Annual return shows how an investment performs over a period of time. The annual return is a percentage, so companies are able to compare the return on two investments with different initial cash flows. For example, a stock costing $15 that earns $20 and another stock costings $100 making $25. While the $100 stock has a higher return in dollar values, the $15 stock has a higher return. This is important when seeing how investments perform.

Determine the beginning price of the investment and the ending price of the investment. For example, on Jan. 1 a stock was worth $50. On Dec. 31, the stock was worth $70.

Subtract the beginning price from the ending price. In the example, $70 minus $50 equals $20. This is the change in price.

Divide the change in price by the beginning cost of the investment. In the example, $20 divided by $50 equals 0.4 or 40 percent.

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