Percentage Change: Your Secret Weapon for Financial Success
Percentage change is a powerful metric used extensively in finance to represent the price change of a stock over time, expressed as a percentage. Whether you are tracking stocks, market indexes, or your company’s financial performance, understanding and utilizing percentage change can provide invaluable insights. Learn how to calculate percentage change and leverage this tool for better financial strategies.
Key Takeaways
- Percentage change is crucial for monitoring the price changes of stocks and market indexes.
- It helps in comparing the values of different currencies and analyzing financial statements.
- Knowing how to calculate percentage change accurately can make a big difference in investment decision-making.
How Percentage Changes Work
Percentage change can quantify shifts in any measurable entity over time. In finance, it’s frequently employed to monitor large market indexes and individual securities. It’s also pivotal in comparing currency values and evaluating balance sheets.
For instance, companies displaying comparative financial statements often include the percentage changes in asset prices over different time periods. This showcases essential indicators such as year-over-year (YOY) revenue growth.
Consider a practical example: For the third quarter of 2020, Starbucks reported a 38% drop in net revenues due to COVID-19. By the fourth quarter, the reduction was 8%. These changes reflect the business’s trend towards recovery from unprecedented disruptions.
Formula and Calculation of Percentage Change
To calculate a percentage increase, follow these steps:
- Subtract the original number from the new number to find the increase.
- Divide the increase by the original number.
- Multiply the resulting quotient by 100 to get the percentage increase.
1Increase = New Number - Original Number
2Percentage Increase = (Increase / Original Number) × 100
To calculate a percentage decrease, reverse the order:
- Subtract the new number from the original number to find the decrease.
- Divide the decrease by the original number.
- Multiply by 100 to get the percentage decrease.
1Decrease = Original Number - New Number
2Percentage Decrease = (Decrease / Original Number) × 100
Uses of Percentage Change
Different industries and entities use percentage change for various analyses, including:
- Measuring Investment Returns: Determining the return on investments (ROI) for stocks, bonds, and mutual funds.
- Analyzing Price Movements: Identifying trends and volatility in stocks, commodities, and financial instruments.
- Evaluating Portfolio Success: Assessing individual assets’ performance within a portfolio to make informed decisions about asset allocation.
- Comparing Financial Measures: Analyzing revenue, profit growth, or profit margins across different time periods.
- Assessing Volatility: Measuring and evaluating the inherent risks of investments.
- Setting Benchmarking: Comparing holdings against benchmarks like indexes or industry averages.
- Managing Risk: Leveraging percentage changes to assess potential gains or losses when setting stop-loss levels or position sizes.
Example of Calculating Percentage Change
Grace bought shares of a stock at $35 per share on January 1. By February 1, the stock price increased to $45.50 per share. The percentage increase can be calculated as follows:
- Difference in price = $45.50 - $35.00 = $10.50
- Increase as a percentage = ($10.50 / $35.00) × 100 = 30%
Grace’s shares increased by 30% in value.
Frequently Asked Questions (FAQ)
How Do I Calculate Percent Change?
- For increases, use:
(New Price - Old Price) / Old Price × 100 - For decreases, use:
(Old Price - New Price) / Old Price × 100
What Is a Balance Sheet, and How Does It Relate to Percentage Changes?
A balance sheet displays a company’s financial state at a specific time. Companies often track changes in account balances from period to period using percentage changes to analyze financial health.
The Bottom Line
Percentage change is a vital analytical tool in finance. It helps track shifts in asset values, compare financial statistics over time, and make informed investment decisions. Whether measuring stock performance or financial health, mastering the calculation and implications of percentage change is essential for successful financial management.
Related Terms: return on investment, balance sheet, year over year, stop-loss levels, market index.
References
- Starbucks Stories & News. “Starbucks Reports Q3 Fiscal 2020 Results”.
- Starbucks Investor Relations. “Starbucks Reports Q4 2020 Results”.
- Starbucks Investor Relations. “Starbucks Reports Record Q4 and Full Year 2021 Results”.
- Reed College. “Percentage Change and Percentage Point Change: A Primer”.
- Harvard Business School Online. “How to Prepare a Balance Sheet: 5 Steps for Beginners”.
