1. Absolute return vs. CAGR
Absolute return is the simple percentage gain: (Sell value − Buy value) ÷ Buy value × 100. It doesn't account for how long you held the stock.
CAGR (Compound Annual Growth Rate) is the annualised return. It's the rate at which your investment would have grown if it grew at a steady rate every year.
💡 A 100% absolute return over 5 years is 14.87% CAGR. The same 100% over 10 years is only 7.18% CAGR. Always compare CAGR across investments.
2. Total return includes dividends
A stock's "return" isn't just price appreciation. Dividends add to your total return. A stock that rose 20% and paid a 3% dividend gave you 23% total return.
This is why total return is the correct metric, not just price return.
3. The real cost of brokerage
When you buy and sell a stock, you pay:
- Brokerage: ₹20 per order (discount brokers) or a percentage (full-service)
- STT (Securities Transaction Tax): 0.1% on delivery buy and sell
- Exchange charges: 0.00325% per transaction
- GST: 18% on brokerage + exchange charges
- Stamp duty: 0.015% on buy side
- SEBI charges: ₹10 per crore
These add up to roughly 0.3%–0.5% per round-trip for delivery trades, or more for small trades with fixed brokerage.
4. Tax treatment of stock gains
| Type | Holding period | Tax rate |
|---|---|---|
| LTCG (equity) | > 1 year | 10% above ₹1 lakh/year |
| STCG (equity) | < 1 year | 15% |
| Dividends | Any | Slab rate (TDS 10% above ₹5,000) |
The ₹1 lakh LTCG exemption is per financial year, across all equity investments. So if you sell two stocks with ₹1.5 lakh total LTCG, you pay tax on ₹50,000.
5. A worked example
Buy 100 shares of Reliance at ₹2,450 = ₹2,45,000. Sell at ₹3,200 = ₹3,20,000. Holding: 3 years. Dividends: ₹4,000.
- Buy value: ₹2,45,000
- Brokerage (0.5%): ₹2,825 (both sides)
- Sell value: ₹3,20,000
- Gross gain: ₹3,20,000 + ₹4,000 − ₹2,45,000 − ₹2,825 = ₹76,175
- LTCG tax (10% above ₹1L): ₹0 (gain under ₹1L)
- Net gain: ₹76,175
- CAGR: ~9.8%
✓ This investment returned 9.8% CAGR over 3 years — including the effect of dividends and brokerage.
6. Comparing with mutual funds
Individual stocks carry concentration risk. A single stock can fall 50% in a bad year. Mutual funds spread risk across 30–60 stocks. Unless you have the time and skill to pick stocks, index funds or diversified equity funds are often better.
However, direct stocks can deliver higher returns if you pick winners. The trade-off is higher volatility and the need for active monitoring.
7. Common mistakes to avoid
- Ignoring taxes. Pre-tax returns are not what you keep. Post-tax CAGR matters.
- Forgetting brokerage. Small trades with fixed brokerage can lose money even when the stock rises.
- Comparing absolute returns across periods. Always use CAGR for periods over 1 year.
- Ignoring dividends. Total return is the true return. Include dividends in your calculation.
- Overtrading. Frequent buying and selling increases costs and taxes.
- Not tracking properly. Keep a record of all buy and sell prices, brokerage, and dividends.
8. Final thoughts
Stock returns are best evaluated on a total return, post-tax, annualised basis. Absolute returns and pre-tax returns can mislead.
Use this calculator to see your true return. Then decide whether the stock is worth holding or whether a diversified fund would serve you better.
