Investment Analysis
Identify the Components of Realized Return of Common Stock
The real return on the sale of stock is often referred to as the realized return as this is the true rate of return of the risk of investment. Many often mistake the realized return as the gain from the sale of the stock in the secondary market, or at most, the inclusion of dividends that have accrued over the period of ownership. However, as these are indeed components of the formula, the often overlooked area of the return is the tax.
The function of the realized return for common stock in all markets includes the dividend growth model added to the difference between stock purchase price and stock sales price. Therefore, if the stock paid a .10cent dividend on March 31, and the 1000 shares of stock was sold on April 1st, purchased at $20.00 and sold at $30.00, the realized return would be the dividend amount of ten cents multiplied by the 1000 shares sold and again multiplied by the difference between the purchase and selling price ($10.00).
Additionally, the realized return is the amount gained after the exclusion of the capital gains and the ordinary income tax. This is often not included in the definition of realized return, however, tax is indeed relevant to the realized return and is relevant to when an investor decides to sell a stock position. Therefore, the components of a stock's realized return include the dividend yield, the gain (loss) on the sale of stock, and the reduction of tax from the gain.
Contrast Systematic and unsystematic risk
Systematic risk is often associated with the risk that can be 'factored' out or removed...
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