How is total return used to calculate the price of a stock?

Expert Answers
Michael Ugulini eNotes educator| Certified Educator

Total return is not used to calculate the price of a stock. The price of a stock is the price at which it is exchanged on equity exchanges, like the New York Stock Exchange. Total return of a stock is used to calculate, for an individual investor, the "actual returns (of an investment) on a stock over a period of time." Total stock return applies to one investor's investment return on one particular stock at one particular time. 

The total return value assists investors in looking at their returns over time. Total stock or equity return is used as an indicator of stock (equity) price appreciation as well as dividends received by an investor. Therefore it does not reflect just the stated market price of a stock at any point in time.

Total return lets an investor know the true value of a stock to said investor - who holds the stock for a period of time and reaps the benefits if the stock price increases overall during that period (despite the occasional blip of downward movement). If, overall, the price increases during that period, the investor certainly gains.

An investor also gains through regular dividend distributions by an corporate publicly-traded entity. Furthermore, the investor gains by way of regular dividend increases that a company may announce. Therefore, over a period of time an investor can asses their total return. They look at the price they initially paid for a company's stock. They subsequently take into account the current stock price, which is hopefully higher, and consider all the dividends they've received over the time period and any dividend increase.

Now they have the Total Stock Return they've gained. This gives the investor their basic ROI (Return on Investment) for the particular stock. Again, these calculations have no bearing on calculating stock price. Stock price and stock return (i.e., value, worth, net gain, investment gain) are not equal nor interchangeable terms.

Total Stock Return = Stock Price Appreciation + Dividends Paid, divided by Original Stock Price.