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Author: TMFRadish Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27844  
Subject: UPDATED: Understanding the Summary Date: 9/27/2000 1:08 AM
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A change was made to the Realized Gains section:

What do the numbers in the summary mean?

Cost of Holdings. The sum of the cost of your buys and shorts, minus the original cost of your sells and covers. For example, if you buy 10 shares of something at $6.25/share and pay a $14.95 commission, your cost of that holding is $77.45 (10 times 6.25 plus 14.95). If you then sell 2 shares for $15.50/share and pay another $14.95 commission, your Cost of Holdings will go down by $15.49 because that's what your cost was on those shares ($77.45 divided by 10 shares equals $7.745/share, times 2 shares is $15.49). What happens to the money you made? Well, your proceeds from the sale were $16.05 (2 times 15.50 minus 14.95), and your original cost was $15.49, so your gain is a whopping $0.56 — which gets added to your Realized Gains. (Next time, find a broker with a smaller commission!) The calculations are the same for short/cover, except you use a negative value for the number of shares (yes, you calculate a “cost” for shorts and the “proceeds” of covers — both of which will be negative).

Cash Balance. This is the amount of uninvested cash you'd have if your portfolio was a brokerage account. Cash Balance is increased by: deposits, cash dividends, interest, misc credits, proceeds of sells, and the “cost” of shorts. Cash Balance is decreased by: withdrawals, paid dividends, misc expenses, the cost of buys, and the “proceeds” from covers. (See Cost of Holdings on how to calculate the cost of buys/shorts and the proceeds of sells/covers.)

Current Value. The value of all your holdings, including your Cash Balance. The value of each holding in your portfolio is determined by multiplying the number of shares held by the latest available quote (remember, quotes are delayed). For short positions, the value will be negative (that is, it will be what it would cost you to cover the position). Since the commission and fees you would pay to sell (or cover) are not known, they are not deducted when computing the Current Value.

Realized Gains. The amount of money you have made by selling stocks you bought, or by shorting stocks. To calculate Realized Gains, the original cost of the stocks is deducted from the proceeds. See Cost of Holdings, above, for an example. Also included in Realized Gains are interest, dividends, reinvested dividends, and misc credits. Paid dividends and misc expenses are subtracted from Realized Gains.

Unrealized Gains. The amount of money you would make if you could sell (or cover) all your holdings at the latest quote without paying any commissions or fees. Or lose, if the number shown is negative. Remember, quotes are delayed, and chances are you'll be paying a commission and/or fees.

Total Gains. The sum of Realized Gains and Unrealized Gains. Also called Long-Term Gains.

My Annualized Return. This figure lets you compare the returns of your portfolio to other investments, taking both the amount of money invested and the length of time it has been invested. It's based on your portfolio's Current Value and “cash-flows”. If you click on Edit:Portfolio and then click on the button next to Cash History, you'll see the cash-flows for your portfolio: “deposit” indicates money put into the portfolio, and “withdrawal” money taken out. Let's say you want to compare your portfolio to an ordinary bank account with daily compounding. Imagine you make deposits into the bank account in the same amount, and on the same date, as shown in the Cash History for your portfolio; and of course take the withdrawals out as well. My Annualized Return shows what the APY (annual percentage yield) of your imaginary bank account would have to be in order to have a balance today that's equal to your portfolio's Current Value. Why do we use annualized figures? See the note on annualized returns below.

Benchmark. This is the same as My Annualized Return, except it uses a Benchmark Value rather than your portfolio's Current Value (it still uses the same cash-flows from your deposits and withdrawals). The Benchmark Value is calculated by figuring out how many “shares” of the selected benchmark you could buy with your deposits (using the closing value of the benchmark from the day before the date of the deposit), minus how many “shares” you'd have to sell to come up with the cash taken out by your withdrawals (again, using the closing value from the day before). Then the number of “shares owned” is multiplied by the current value of the benchmark to come up with the Benchmark Value. Like My Annualized Return, the figure shown is annualized. Why? See the note on annualized returns below.


A note about annualized returns. People often say that annualized returns are fantasy because they “project” your return so far over an entire year — and your stocks are not likely to have the same gains in the future as in the past. This is simply a misunderstanding about how to interpret the measurement. If you are driving and your speedometer says 55 miles per hour, is that speed only accurate if you continue driving at a fixed speed for an entire hour? No, the number represents your present speed, scaled for a standardized time unit.

Let's say you put $1000.00 in an ordinary bank account with daily compounding, and four months later take out $1020.10. The APY for your bank account was 6.19%. No “projection” of what “would have happened” if you'd left the money in a year is necessary: the 6.19% annual percentage yield is what you actually earned during the time the money was invested. The interest rate on the bank account was about 0.016% daily — but most likely the bank would say the interest was “6% compounded daily”, which is the annual rate. Just as it is customary to give automobile speeds based on a time unit of one hour, it's customary to give interest rates and investment returns in terms of a time unit of one year.

Another thing people frequently say about investment returns is that you should only look at your actual gain (Long-Term Gain). That's like asking your speedometer to give you your speed in miles/trip — so if you're going 55 miles per hour but your trip is only 20 minutes, your actual distance gain is 18.33 miles. The 18.33 miles number is useful information, certainly, but it doesn't tell you your speed. Similarly, with that 4-month bank account your gain was $20.10, but that doesn't tell you if you'd have been better off with a 9-month fixed-term investment with a gain of $44.10. The APY for such an investment is only 5.92% — so your bank account was better at 6.19% APY, even though the gain was less.

Phil
TMFRadish
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