Stock performance is a measure of the returns on shares over a period of time. There are a number of measures of stock performance and each includes its own characteristics and benefits during an analysis of returns. The period over which stock returns are measured is chosen based on personal preferences, but the portfolio managers usually measure stock performance on daily, weekly, monthly and yearly basis.
The Concept of Total Return
Stock performance includes two separate components: capital gains or losses and dividends. The capital gains or losses are the result of stock price movements, a gain results from an increase in price while a loss results from a decrease in price. The dividends are often paid by companies out of the company profits to the shareholders. When these two components are added together, they form the total returns for the stock.
Calculation of Stock Returns
Stock performance can be calculated using the simple formula for calculation of returns. Suppose an investor purchased a stock last year for $100, the price of the shares is $120 today and the dividends paid at the end of the year are $5. The returns on the stock based on the total return estimation are 25 percent [(120+5-100)/100]. Similarly, if the stock price had decreased to $70, the stock performance returns would be negative 25 percent [(70+5-100)/100].
Relative Stock Performance
It is important to measure stock performance relative to a market benchmark or an industry benchmark. A benchmark is any portfolio that is representative of the stock held by an investor. By comparing the returns of the portfolio against its benchmark, the performance of the stock can be categorized relative to the benchmark. If our stock appreciated by 25 percent, but the benchmark market appreciated by 50 percent, our stock underperformed the market by 25 percent. While if our stock decreased by 25 percent, while the market benchmark decreased by 50 percent, it means our stock outperformed the market by 25 percent.
Absolute Stock Performance
This is a measure of stock performance without comparison to any other market or portfolio. Investors that prefer absolute stock performance measures dislike risk more than an average investor. This measure does not care if a stock outperformed or underperformed a market; all that matters is that our stock performed well or not.
Risk and Stock Performance
It is essential to understand the risks involved in stock investing. High stock performance is most likely associated with higher risk-taking behaviour. Finance theory links risks to returns; any stock that has high expected returns is most likely to have a higher level of risk involved. This implies that an average investor should always be cautious while investing and should properly investigate the risk for a stock before investing.