Now let's discuss a useful ratio for investors, the Economic Return of Investing. The Economic Return of investing from investing is a ratio used by investors to analyze their profits. To see how much they're actually making from their investments. We're not going to use financial statements directly here, because we're looking from the investor's perspective in this case. We're going to look at what the investor received in dividends, in capital appreciation, and how much they invested into the stock. A company could use these too. If a company is buying short-term investments, they would be the investor in this case. But for the most part, we're thinking from the investor's perspective here. So let's check out the economic return from investing. In the numerator, we've got dividends and interest received. To that, we're going to add the change in fair value of the investment.
The dividend and interest received, notice below the green box, the economic return comes from two sources. The first one is the dividends received. And the other way we make money as investors, we get dividends; that's just cash we receive from our investment. But we can also gain from capital appreciation, the capital gains, and losses. This is when the fair value of the investment changes. Let's say you bought a share of stock for $20, and then it went up to $30 by the end of the year. That change in the value of the stock, that's money you essentially earn. If you sold the stock right now, you would have been up those $10. The change from the 20 up to the 30 would have been a gain of $10. You can also lose money; if you bought it for 20 and it went down by 5 and it's down to 15. That's a capital loss in that case. In our numerator, we have those dividends and interest received. That deals with our dividend yield. Dividends, that's more if we're dealing with stock. And interest, that's if we had bought a bond or something like that.
And then we also have the change in fair value. So that's the capital appreciation, the gains, or losses from the change in the value of the investment. That's everything that's like all the profit we can get. We either get it from dividends or from the change in fair value. We're going to divide that by the original cost of the investment, and we're going to call it the fair value at the beginning of the period. Because when we're dealing with investments, we're generally going to be changing the fair value, so at the beginning of the period, it's going to be where we started from, and then we'll see what's happened during the period. The fair value at the beginning of the period, and they're generally just going to have to give you that information. This ratio, we usually show it as a percentage. So you're just going to have to multiply by 100, move that decimal two places over to get into percentage mode.
So, in the numerator, like we said, it's showing all the profits that we can get, and the denominator is showing the value at the beginning of the period. So how much did we get based on what we started with? It's showing the amount of profit or loss, but this is per dollar invested. Once we get our actual percentage, what if it says 5%? That means for each dollar we invested, what we're getting a nickel in profit. So that's about it for the economic return from investing. Let's go ahead and jump into some practice problems and calculate this ratio.
