Price return

What Is Price Return?

Price return is a measure of investment performance that quantifies the capital appreciation or depreciation of an investment over a specific period, excluding any income generated from the asset, such as dividends or interest payments. This metric primarily reflects changes in the market price of a security, index, or portfolio. It falls under the broader financial category of return on investment analysis. While often cited for stock market indices, price return offers a partial view of an investment's true profitability because it does not account for the income component that many financial assets can provide.¹⁷, ¹⁸

History and Origin

The concept of measuring investment performance dates back to the earliest organized financial markets. Historically, simply observing the change in the listed price of a stock or bond was a straightforward way to gauge its performance. As financial instruments and markets grew more complex, particularly with the introduction and widespread use of dividends, the distinction between capital appreciation and income became more critical for investors. Major stock market indices, such as the S&P 500, are often quoted in terms of price return, which omits the impact of reinvested dividends. For instance, the S&P 500 index, as tracked by the Federal Reserve Economic Data (FRED), is primarily a price index and does not include dividends.¹⁶ This practice, while common for simplicity in reporting market movements, has led to a focus on price changes that can understate the actual gains for long-term investors.

Key Takeaways

Price return measures only the change in an investment's market price.
It excludes income streams like dividends or interest payments.
Price return provides a quick snapshot of capital gains or losses.
It is often used for stock indices but offers an incomplete picture of total investment profitability.
For a comprehensive evaluation, price return should be considered alongside other metrics.

Formula and Calculation

The formula for calculating price return is straightforward, representing the percentage change in an asset's value from one point in time to another.¹⁵

\text{Price Return} = \frac{(\text{Ending Price} - \text{Beginning Price})}{\text{Beginning Price}} \times 100\%

Where:

Ending Price is the market price of the asset at the end of the holding period.
Beginning Price is the market price of the asset at the start of the holding period.

For example, if a stock was purchased at $50 and later sold at $55, its price return would be:

\text{Price Return} = \frac{(\$55 - \$50)}{\$50} \times 100\% = \frac{\$5}{\$50} \times 100\% = 0.10 \times 100\% = 10\%

Interpreting the Price Return

Interpreting price return involves understanding what it represents and, equally important, what it does not. A positive price return indicates a capital gains, meaning the asset's market value has increased over the period. Conversely, a negative price return indicates a capital loss. While a simple and intuitive metric, price return alone does not capture the full profitability of an investment, especially for equity investments that pay dividends or fixed income securities that pay interest. Therefore, relying solely on price return can lead to an incomplete understanding of true investment performance.

Hypothetical Example

Consider an investor who buys 100 shares of Company A stock at $100 per share on January 1st. On December 31st of the same year, the stock's market price has risen to $115 per share. During this period, Company A did not pay any dividends.

To calculate the price return for this investment:

Beginning Price: $100
Ending Price: $115

\text{Price Return} = \frac{(\$115 - \$100)}{\$100} \times 100\% = \frac{\$15}{\$100} \times 100\% = 0.15 \times 100\% = 15\%

The price return for this investment is 15%. This example illustrates the capital appreciation of the stock, reflecting only the change in its market price over the year. It does not factor in other potential returns, such as dividends, which, in this specific scenario, were zero. This calculation helps assess the effectiveness of the investment in generating capital gains within a particular holding period.

Practical Applications

Price return is frequently used in several areas of finance and investing:

Index Reporting: Many widely followed stock market indices, such as the S&P 500, are primarily reported based on price return, reflecting the aggregate capital appreciation of their constituent stocks. The Federal Reserve Bank of St. Louis's FRED database, for instance, provides the S&P 500 as a price index.¹⁴
Momentum Trading: Traders focused on short-term price movements and technical analysis often prioritize price return, as it directly reflects the market price changes that drive their strategies.
Capital Gains Analysis: Investors specifically interested in assessing the growth of their principal investment, without the distraction of income distributions, use price return. This can be particularly relevant for non-dividend-paying equity investments or commodities.
Performance Benchmarking (with caveats): While generally less comprehensive than total return, price return can be used as a simple benchmark for comparing the capital appreciation component of different financial assets or managers, especially when income streams are minimal or absent. Financial regulators, such as the U.S. Securities and Exchange Commission (SEC), emphasize clear disclosure of how performance is presented, including distinctions between gross and net performance, which often relates to whether fees and income are included.¹¹, ¹², ¹³

Limitations and Criticisms

Despite its simplicity, price return has significant limitations that can lead to a misleading understanding of true investment performance:

Exclusion of Income: The most significant criticism is that price return completely ignores income generated from investments, such as dividends from stocks or interest from fixed income securities. For income-generating assets, this omission can drastically understate the actual return on investment. Studies indicate that dividends have been a substantial contributor to long-term equity returns.⁹, ¹⁰
Incomplete Picture for Long-Term Investors: For long-term investors, especially those focused on building wealth through compounding, the reinvestment of dividends plays a crucial role in overall portfolio growth. Price return fails to reflect this compounding effect.
Misleading for Benchmarking: Comparing a managed mutual funds or index funds that include reinvested dividends against a price-return-only index can unfairly make the managed fund appear to outperform, even if its underlying capital appreciation is lower.
Ignores Reinvestment: Price return does not account for the opportunity to reinvest income, which enhances future returns. This is a critical aspect often overlooked when only focusing on price movements.⁸
Time Value of Money and Risk: While price return gives a percentage change, it does not inherently account for the length of the holding period or the risk taken to achieve that return, which are vital for a comprehensive analysis.⁵, ⁶, ⁷

Price Return vs. Total Return

Price return and total return are two fundamental measures of investment performance, often confused due to their focus on an investment's profitability. The key distinction lies in their inclusivity of income.

Price return measures only the change in the market price of an asset or index over a specific period. It focuses solely on capital gains or losses. For example, if a stock goes from $100 to $110, its price return is 10%, regardless of any dividends paid.⁴

Total return, in contrast, provides a comprehensive measure of an investment's performance by including both the capital appreciation/depreciation and any income generated (such as dividends from stocks, interest from bonds, or distributions from mutual funds). It assumes that all income received is reinvested into the investment.³ Therefore, the total return will always be equal to or greater than the price return for income-generating assets. For example, if that same $100 stock went to $110 and paid a $2 dividend during the period, its total return would be:

\text{Total Return} = \frac{(\text{Ending Price} - \text{Beginning Price} + \text{Dividends})}{\text{Beginning Price}} \times 100\% = \frac{(\$110 - \$100 + \$2)}{\$100} \times 100\% = \frac{\$12}{\$100} \times 100\% = 12\%

This demonstrates why total return is generally considered a more accurate reflection of an investor's actual experience and the complete profitability of an investment.

FAQs

Why is price return often quoted instead of total return for market indices?

Price return is often quoted for its simplicity and because it directly reflects daily fluctuations in the stock market prices. It is easier to calculate and track in real-time without needing to account for dividend reinvestment complexities. However, for investors, total return generally provides a more complete picture.²

Does price return include inflation?

No, price return, like nominal returns, does not typically account for inflation. To understand the real purchasing power of an investment's gain, the price return would need to be adjusted for inflation, resulting in a "real return."

Is price return useful for all types of investments?

Price return is most directly applicable to investments where capital appreciation is the sole or primary source of return, such as non-dividend-paying stocks or commodities. For investments that generate significant income, like dividend stocks or bonds, relying solely on price return would be misleading and incomplete.¹

Can a stock have a positive price return but a negative total return?

No, for a single investment, total return will always be equal to or greater than price return, because total return includes price changes plus any income. If the price return is positive, and income is non-negative, the total return will also be positive. However, if an asset has a positive price return but other factors like high fees or significant risk were involved, its overall attractiveness might be diminished.

How does price return relate to risk?

Price return measures the outcome of an investment's price movement but does not directly quantify the risk taken to achieve that return. Investors often analyze price volatility or other risk metrics alongside price return to assess the risk-adjusted investment performance.