What is Percentage Gain: Meaning, Formula & How It Works

Understanding how an investment is performing is considered an important part of portfolio management. Percentage gain gives a quick snapshot of this, allowing Indian investors to compare different assets and investment options. Learning about this metric may be the first step in moving from casual investing to structured analysis.

Table of contents

• What is percentage gain?
• Why percentage gain is important
• Percentage gain formula
• How to calculate percentage gain – step-by-step example
• Use of percentage gain in investments
• CAGR vs simple percentage gain
• Common mistakes in calculating gains
• Percentage gain vs. percentage return
• Online tools to calculate percentage gain

What is percentage gain?

In simple terms, percentage gain is a financial metric that measures how much an asset's value has gone up compared to its original purchase price. It is expressed as a percentage. One way to look at it is that it answers the simple question: "By what percent did my initial investment grow?"

For instance, if a Rs. 10,000 investment grows to Rs. 12,000, the absolute gain is Rs. 2,000. The percentage gain is 20%. That 20% figure could now be directly compared to the performance of any other asset.

The figures shown are for illustrative purpose only. Past performance may or may not be sustained in future.

Read Also: A Simple Guide to Calculate Mutual Fund Returns Online

Why percentage gain is important

The value of percentage gain goes beyond just calculating a profit. Its importance lies in that it enables objective comparisons and helps in making strategic decisions.

• Standardised comparison: An investor might use percentage gain to compare one investment with another – for example, the performance of an investment in a small cap stock against a lumpsum in a large cap mutual fund.
• Performance benchmarking: It is advised to measure the performance of investments, particularly equities and mutual funds, against a relevant benchmark and not in isolation. Percentage gain is a metric that could be used as a benchmarking check.
• Goal tracking and real returns: Financial goals are generally tied to time horizon and inflation. Investors are recommended to track whether their portfolio's percentage gains are consistently keeping ahead of the rate of inflation.

However, percentage gain is just one of the several performance tracking metrics available and should not be used in isolation. Moreover, it is generally recommended that investors also consider their risk appetite, goals and financial circumstances when making investment decisions, rather than relying on potential gains alone.

Percentage gain formula

The formula for calculating percentage gain is:

Percentage Gain % = [(Selling Price - Purchase Price) / Purchase Price] * 100

Here:

• Selling price, for realised gains, is the actual price at which you sold the asset; for unrealised gains, it is taken as the current market price at which the asset could be sold today.
• Purchase price is the total amount paid to acquire the asset.

How to calculate percentage gain – step-by-step example

Here is a method to determine the percentage increase on investments, demonstrated with an example:

Let us presume that you invested Rs. 4,000 in purchasing a stock, which increased in value to Rs. 4,600. In this instance, the percentage increase will be:

((Rs. 4,600 –Rs. 4,000) / ₹4,000) * 100 = 15%.

The figures shown are for illustrative purpose only.

Use of percentage gain in investments

Percentage gain as a metric may be applied to various asset classes. For equities and mutual funds, it tracks the potential capital appreciation from the purchase price to the current market price.

For bonds, percentage gain is calculated when the bond is sold at a price higher than its purchase price, that is, at a premium. The same philosophy is also applicable for real estate.

However, for bonds, percentage gain includes both capital appreciation (when sold at a premium over purchase price) and income from coupon payments. The calculation differs based on whether the bond is held to maturity or sold before maturity. Total returns on bonds should consider both price appreciation and interest income.

For real estate, calculations get more complex when other charges come into the picture, such as brokerage fees for equities or stamp duty and registration fees. It is advised to be aware of these costs of investments while calculating the percentage gain.

Read Also: Return on Investment (ROI): Meaning, Benefits, and Formula

CAGR vs simple percentage gain

A major limitation of the simple percentage gain formula is that it is time-agnostic. It tells you how much you gained but not the timespan. For instance, a 10% gain in one year may be more favourable than a 10% gain in five years (though individual investment goals and circumstances may vary), but percentage gain does not lend this insight. That’s why, for investments spanning more than a year, Compound Annual Growth Rate (CAGR) may be a more relevant metric. CAGR calculates the annualised rate of return for an investment held over a given period, assuming that all returns are reinvested. It represents the hypothetical, constant rate at which the investment would have grown each year to reach its final value. Thus, CAGR takes time into account to show the year-on-year growth of an investment.

Common mistakes in calculating gains

In practice, investors may be prone to certain avoidable errors in calculation that might lead to a distorted view of the portfolio's real performance.

1. Ignoring transaction costs: Failing to add brokerage, depository (DP) charges, and exchange fees to the cost basis could inflate the calculated gain, making it look bigger than it really is.
2. Ignoring inflation: Failing to adjust returns for inflation might make an investment appear more profitable than it truly is. Investors may wish to compare their nominal gains with inflation to understand their real, inflation-adjusted growth.

Percentage gain vs. percentage return

In financial analysis, these terms have specific meanings, though they might overlap in casual use.

• Percentage gain: This term refers to capital appreciation - that is, the profit from the increase in an asset's price.
• Percentage return: This is a more comprehensive metric. It includes both the capital gain and any income generated by the asset during the holding period.

Online tools to calculate percentage gain

• Most trading platforms provide profit and loss reports that detail both realised and unrealised gains, along with breakdowns of transaction costs such as brokerage and taxes, so that investors may be able to see the impact of these charges on their net returns.
• One could use Microsoft Excel or Google Sheets to calculate percentage gain by inputting the relevant formulae.
• CAGR, ROI, and percentage gain calculators are available online that could be used as well.

Read Also: Annualised Return - Meaning, Formula and Calculation

Conclusion

The percentage gain is deemed a foundational metric for any investor, providing a standardised tool for comparing the performance of different assets. For multi-year investments, it is recommended to supplement simple percentage gain with CAGR, which provides a more time-aware and comparable measure of performance. Understanding these basic return calculations is a step toward effective portfolio management and objective, data-driven financial decision-making.

FAQs

How does absolute gain differ from percentage gain?

Absolute gain is the total profit in monetary terms. Percentage gain expresses this profit as a proportion of the original investment, which allows for performance comparison between investments of different kinds.

Is a negative percentage gain possible?

Yes. If the current market value of an asset is lower than its original cost basis, the formula will yield a negative result, which is known as a percentage loss.

Are percentage gain and Return on Investment (ROI) identical?

Percentage gain and ROI are mathematically similar but differ in a contextual sense. However, many simplified articles may treat them as identical.

What is considered a 'good' percentage gain for stocks?

The gain percentage that may be considered suitable for an investment is relative. Different asset classes have different return potentials and market conditions also influence returns. So, what counts as suitable ultimately depends on the benchmark, time period, and level of risk taken.