Gain Formula

Formula to Calculate Gain

An investor earns a gain or profit when he or she sells the instrument of economic value or asset at a price above the buying price of the asset. The buying price of the asset is the price at which the investment gains exclusive right or ownership towards the asset. When the asset sells, the price that the individual quote is termed as the selling price.

Gain Realized Formula = Selling Price – Buying Price.
Gain-Formula

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For eg:
Source: Gain Formula (wallstreetmojo.com)

Here,

Selling price > Buying price.

Explanation of Gain Formula

The formula for gain can be calculated by using the following steps:

  1. Firstly, determine the type of asset an individual owns. The economic utility and condition of an asset helps in determining its fair market value in the market.

  2. Next, Access the nearest financial marketFinancial MarketThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more where the identified asset is traded actively. Such markets where the same assets are bought and sold makes it easier for the individual to determine the effective available value. Such markets offer absolute liquidity.

  3. Next, compare the market price of assets available from the financial markets. Then compare it with the buying price.

  4. Next, determine the cost of transactions that would come into the play if the investor decides to sell the asset.

  5. Next, if the available market value is more than the price on which the individual acquired an asset and covers the scope of transaction costs, then it should sell the asset at that price to arrive at again from the financial asset.

Calculation Examples of Gain (with Excel Template)

Let’s see some simple to advanced examples of the gain formula to understand it better.

You can download this Gain Formula Excel Template here – Gain Formula Excel Template

Example #1

Let us take the example of a trader who had bought 200 shares at a price level of $300. Currently, the stock trades at $430. The trader decides to liquidate its position at the price level of $430.Help the trader determine the gain earned from the financial transaction.

Solution:

Use the given data for the calculation of gain.

Gain Formula Example 1

Assume that the transaction costs are zero.

Calculation of gain earned by the investor can be done as follows:

equation 1.1

Gain Earned by Investor = $86000 – $60000

The gain Earned by Investor will be –

Gain Formula equation 1.2

Gain Earned by Investor = $26,000

Therefore, the trader makes a gain of overall $26,000 over the entire transaction.

Example #2

Let us take the example of individuals who had bought a house at a buying price of $1,000,000. The individual is planning to move out of its current location and intends to settle an offshore location. The property broker informed the individual that the current market value of the house stands at $1,300,000. The individual decides to liquidate its position at the price level of $1,300,000.Help the individual determine the gain earned from the financial transaction. 

Solution:

Use the given data for the calculation of gain.

equation 2

Assume that the transaction costs are zero and have nil property tax.

Calculation of gain earned by the investor can be done as follows:

Gain Formula equation 2.1

Gain Earned by Investor = $1,300,000 – $1,000,000

The gain Earned by Investor will be –

equation 2.2

Gain Earned by Investor = $300,000

Therefore, the individual earns a gain of overall $300,000 over the entire transaction.

Example #3

Let us take the example of a car seller who had bought an old car for $45,000. He spent an additional $70,000 to modify and refurbish the car. The car looks brand new, and there are two buyers who are keen to purchase the car.

Buyer 1 offers $155,000 as of buying the price, whereas the buyer 2 offers $180,000. The seller eventually sold the car for $180,000. Help the car seller determine the gain earned from the financial transaction.

Solution:

Use the given data for the calculation of gain.

Gain Formula equation 3

Assume that the transaction costs are zero.

Calculation of gain earned by the investor can be done as follows:

equation 3.1

Gain Earned by Investor = $180,000 – $115,000

The gain Earned by Investor will be –

Gain Formula equation 3.2

Gain Earned by Investor = $65,000

Therefore, the car seller makes a gain of overall $65,000 over the entire transaction.

Gain Calculator

You can use this calculator.

Selling Price
Buying Price
Gain Realized Formula
 

Gain Realized Formula = Selling Price - Buying Price
0 - 0 = 0

Relevance and Uses

  • The gains help in the determination of how well the investment undertaken by the individual faired. If the investor held multiple investments wherein one investment resulted in gain while other investments resulted in the loss. The investor’s gain in one investment would then cover the loss made in investment.
  • The gains earned by the individuals are taxed as per the ordinary tax rate. In comparison, gains earned by the corporate entities would be taxed as per the corporate tax rate. However, when the gain is realized, there may be a probability that the asset value may rise further, and there would be a scenario of unrealized loss.
  • Whenever an investor gains, he should record such transactions in the books of accounts. This helps in the accounting of actually realized gain and helps in the actual assessment of taxes as per the tax norms prescribed within the state and nation.

Recommended Articles

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