Primer: Rates of return

Here is a good primer from Small Trades Journal on “rates of return”.  Required reading for those of you interested in understanding financial statements (i.e. everyone).

Small Trades Journal

Preview

The simple rate-of-return ( R ) is a measure of your investment’s profitability for any chosen time interval.  By comparison, the CAGR and IRR are rates of return that measure your investment’s profitability as if it were an orderly process with respect to time.  CAGR is the acronym for “compound annual growth rate”.  It is the constant rate at which an investment’s market value grows every year in a cumulative fashion.  IRR is the acronym for “internal rate of return”, which describes the performance of all cash flows in a financial project such as the individual investor’s program of dollar-cost-averaging or an investment club’s program of portfolio management.  IRR is an annualized rate-of-return when all time intervals are measured in years.

Return

Any profit from your investment is called a return.  There are 2 types of return: realized and unrealized.  Realizedreturns are cash payments from dividends, interest…

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