Table of Contents

Return



Definition

In finance, the term ‘return’ refers to the gain or loss made from an investment over a certain period of time. It can be presented as a percentage and is typically calculated based on the investment’s initial cost. Returns can come in the form of income (like interest or dividends) or appreciation in the investment’s value.

Phonetic

The phonetic spelling of the word “Return” is /rɪˈtɜːrn/.

Key Takeaways

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  1. Return is a key measure of an investment’s performance and profitability.
  2. In finance, the return is the money made or lost on an investment. It may be measured either in absolute terms (e.g., dollars) or as a percentage of the amount invested.
  3. The return often involves risk; higher potential returns are generally associated with higher risk of loss.

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Importance

The business/finance term “Return” is important as it is a key measure of the profitability or financial performance of an investment, business, or any financial entity. It is calculated by comparing the gain or loss made from an investment to the amount originally invested. Understanding the return on an investment helps stakeholders, including investors, creditors, and management, to make informed decisions about whether the investment is worthwhile or not. A higher return typically signals a more profitable investment, attracting more stakeholders. Therefore, the concept of return is crucial in financial planning, investment analysis, and decision-making in business and finance.

Explanation

In the context of finance and business, the term ‘return’ primarily refers to the financial gain or loss made from an investment over a specific period of time. It serves as the measure of the efficiency or profitability of an investment. The return could either be positive, implying that the investment has gained value, or negative, implying a loss in value. In terms of its purpose, the calculation of an investment’s return helps investors assess the performance of their investments, allowing them to make informed decisions about whether to hold, sell, or buy more of a particular investment. It can be used to compare the efficiency of different investments and helps to identify where one is getting the most out of their invested capital.The return is an indispensable tool in finance that is used to determine if an investment is profitable or not. Investors and financial analysts use returns to evaluate the efficiency of investment decisions or the effectiveness of different investment strategies. For example, mutual funds and investment firms often advertise their historic returns to attract prospective investors. Beyond attracting new investors, the return is often used by financial managers as a benchmark for assessing the performance of portfolios, investment strategies, or even individual portfolio managers. As such, the performance of various investments and portfolios is almost universally measured in terms of return.

Examples

1. Stock Investments: An individual who invests in stocks experiences the concept of return when their shares appreciate in value. For instance, if they purchase Apple stocks for $500 and the value goes up to $600 after a year, they have made a return of $100.2. Real Estate Investment: Return can be seen in real estate investment when the value of a property increases over time or generates income through rent. For example, if an individual buys a property for $100,000 and later sells it for $120,000, they get a return of $20,000. Alternatively, if they rent the property out and collect rental income, they are also achieving a return.3. Business Operations: In a business context, the return can also be referred to as the profit a firm earns from its operations. If a company manufactures and sells a product, the cost of raw materials, production, and selling expenses are subtracted from the selling price to calculate the return or profit. For instance, if a company spent $200,000 to manufacture goods and earned $300,000 from selling them, they made a return of $100,000.

Frequently Asked Questions(FAQ)

What is a Return in the context of finance and business?

In the financial or business sector, Return refers to the gain or loss made on an investment. It is generally expressed as a percentage of the investment’s initial cost.

How do you calculate the Return on an investment?

The Return on an investment is calculated by taking the investment’s gain or loss, subtracting the original investment from the final value, and then dividing this by the original investment. The result is then multiplied by 100 to get a percentage.

What types of Returns are there in finance?

There are two main types: realized return and expected return. A realized return is the gain or loss made on an investment already sold, while an expected return is an estimate of what an investor anticipates making on an investment.

What is a good Return on Investment (ROI)?

Generally, a good ROI is considered to be around 10% per year. However, it depends on the investment’s risk level and the health of the overall market or economy.

How does the term Return relate to the stock market?

In the context of the stock market, Return refers to the dividends that shareholders receive, plus any change in the share price.

What is the difference between Positive Return and Negative Return?

Positive Return represents a profit on an investment. It occurs when the investment’s final value is higher than its original cost. A Negative Return represents a loss on an investment, meaning the investment’s final value is less than its original cost.

Is a higher or lower Return better?

Typically, a higher return is better as it indicates that the investment is making more money. However, a higher return often comes with greater risk. Therefore, it’s important to consider both return and risk when assessing investments.

Can Return be guaranteed in an investment?

No, Returns cannot be guaranteed when it comes to investing. The potential return is usually directly proportional to the risk: higher-risk investments may provide higher returns, but also higher potential losses.

Related Finance Terms

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