Return is the profit or loss generated on an investment over a specific period. It is typically expressed as a percentage of the investment's initial cost. This metric can include income received from the investment, such as dividends or interest, as well as capital gains or losses, which are the increases or decreases in the investment's value. The return on an investment provides a comprehensive measure of its performance, accounting for all forms of income and price appreciation or depreciation.
Investors use returns to assess the performance of their investments and to compare the attractiveness of different investment opportunities. A higher return indicates a more profitable investment, assuming equal risk levels. However, it's crucial to consider the time frame and risk associated with achieving these returns. Investments with higher potential returns often come with higher risk, meaning there's a greater chance of losing some or all of the invested capital.
Moreover, understanding different types of returns, such as nominal vs. real returns or annualised returns, is essential for making informed investment decisions. Nominal returns do not account for inflation, whereas real returns are adjusted for inflation, providing a clearer picture of the investment's actual purchasing power increase. Annualised returns offer a way to compare returns over different periods by converting them into an annual format. This nuanced understanding of returns allows investors to better gauge the performance of their portfolios, align investments with their risk tolerance and set realistic expectations for future growth.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.