When you invest in some products or projects, the most common question is that, what is the yield? The yield is an important factor which can influence your choice.
So, what is yield and why yield is so important?
Yield is the earnings of an investment over a particular period of time. It is expressed in terms of percentage. Yield includes the interest earned or dividends received from a particular security.
Let’s put it in an easier way. The yield reflects how much money you are expected to earn form an investment in a particular period of time.
How to calculate yield?
Yield is mostly calculated on an annual basis, other variations like quarterly and monthly yields are also used. Yield is not total return, which is a more comprehensive measure of return on investment.
For example, there are two kinds of gains on stock investment. First, the price rise. If I buy a stock at$100 per share and after a year the price increases to $120, then I earn $20 per share. Second, the stock may pay dividend, such as $2 per share during the year.
The total return is the appreciation in the share price plus dividends paid.
So, the total return = (Price Increase + Dividend Paid)/Purchase Price
However, yield doesn’t include the appreciation of the price.
The general formula for calculating the yield is
Yield = Net Realized Return / Principal Amount
So, yield can calculate or predict how much you’ll earn from an investment. As investors, surely we are hoping to earn money as much as possible. We’ll choose a product with the highest yield. However, it is not always true. Sometimes a yield is a predicted number, which may change due to multiple accidents in the market. we should always be cautious and knowing what you invest.