Founded in by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. An annual return, or annualized return, is a percentage value that tells you how much an investment as increased in value on average per year over a period of time.

Annual return can be a preferable metric to use over simple return when you want to evaluate how successful an investment has been, or to compare the returns of two investments you've held over different time frames on equal footing: An investment that's doubled in five years is obviously preferable to another investment that's taken 50 years to double.

An annual return allows you to compare the two. How not to calculate an annual return Your broker can help you determine what your returns have been on your investments -- but if you don't have a broker yet, come on over to our Broker Center , and we'll help you get started. In the meantime, know that you can't merely divide your simple return by the number of years held because of the compounding power of money.

We can use a dramatic example to illustrate why. If you try to calculate its annual return by dividing its simple return by five, you'd get the wrong answer.

That's because returns compound -- a double in year two doesn't just double the original stock value, but it also doubles the previous years double. If the stock has undergone any splits, make sure the purchase price is adjusted for splits. If it isn't, you can adjust it yourself. For example, if you held a stock for 4 years, during which time it has had a 2: Let's use Campbell Soup as an example.

Suppose it's , and you own shares it doesn't matter how many of the stock. In the meantime, the stock has undergone one split, a 2: Many companies pay their investors cash in the form of dividends.

Since dividends can make up a substantial portion of investing returns, you may decide to calculate an annual return that takes them into account. Back to our Campbell Soup example. The company paid a bunch of dividends from to Here's how you would include those in your annual return calculation:.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Thanks -- and Fool on!

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