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The price return is a determination of the capital gain on an investment, the appreciation caused by a rise in market value. Price returns do not account for interest, dividends, and other earnings an investment may be able to generate. As such, they provide an incomplete picture of the return on investment, and people should take this into account when evaluating statistics about investment returns. It is important to pay attention to the metric analysts use to understand the meaning of their data.
In a total return, the price return is considered, along with gains like interest income, providing a complete overview of how much the investment appreciates within a given time period. This overview is often more helpful for investors. Stock indexes and other investments may provide growth quotes in terms of price return only. This can make it hard to compare the performance of a stock portfolio with an index. Presumably, the portfolio will always grow more than the price return on the index, as it appreciates and experiences growth from interest and dividends.
Separating out appreciation from earnings can be valuable in some circumstances. Capital appreciation is only useful if the investment can be liquidated to access the money. A stock portfolio might have a very high price return, but the stocks could be difficult to sell, making the investment less liquid. Interest and dividend income represents immediate return on the investment, available in liquid form for instant access.
For tax purposes, it can also be important to differentiate between price return and other kinds of returns. People are required to pay taxes on appreciation, but only when assets sell. A person could hold a portfolio with a large price return without paying taxes on it as long as the assets are not sold. Conversely, earnings of interest, dividends, and so forth must be reported on a tax return and are immediately taxable. People planning for taxes may think about these issues when developing an appropriate mixture of investments.
When people see returns quoted for portfolios, indexes, and other types of investments, they should check to see what kind of return is under discussion. Total returns and price returns are very different and may skew perception of the investment if people do not understand which is being used. An analyst, broker, or financial adviser should be able to explain how returns are calculated and estimated so an investor can make an informed decision about what to buy.
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