When it comes to market-linked investments, i.e. those whose returns are linked to the market performance, there is a scope of incurring a loss when the market does not perform well. In such cases, you need to take stock of the loss suffered vis-a-vis the profit earned to know where your portfolio stands. This is where a profit and loss statement comes in handy to make a wise stock market investment.
What is a profit and loss statement of investments?
A profit and loss statement of investments shows the list of investments that you have made along with the profits or losses earned from each of them at a given date. It is like a financial statement of your investments which shows you the net profit or the net loss of your portfolio at any given date.
How to read a profit and loss statement?
Reading the profit and loss statement of your investments correctly is important to assess the profit or loss that you are making from your investments, especially market-linked ones. To read the statement correctly, here are some tips –
- Know the cost price
The cost price is the price that you paid when you invested in an avenue. For example, if you have bought stocks, the cost price of the investment would be the market price of the stock when you bought it. Similarly, in case of mutual funds or ETFs, the NAV at which you invested would be the cost price.
- Determine the profit or loss
Once you have determined the cost price, check the current value of each investment avenue. This would help you find out if you are making a profit or a loss.
Cost price < Current market value = Profit
Cost price > Current market value = Loss
For example, say you bought 100 units of a stock when it was trading on the stock market at Rs. 52/unit. On the stock market today, the stock is trading at Rs. 62/unit. Rs. 52/unit was the cost price and Rs. 62/unit is the current value. Since the cost price is less than the current value, you are making a profit of Rs. 10 per share.
- Check for the expenses
Always consider the expenses incurred on investments. If you paid a brokerage when investing in stocks or if there was an entry load when investing in mutual funds or ETFs, you should account for these expenses when determining your profit or loss.
- Scrutinise the loss-making investments
When analysing the profit and loss statement, emphasis should be given to loss-making avenues. You need to assess if the loss is temporary or if you invested in a loss-making asset. In case of temporary losses, keep patience so that the loss can be converted to a profit. In case of a wrong choice, however, cut down on your losses by switching from a loss-making asset to a profit-making one.
Use these tips and read your profit and loss statement correctly. Reading the profit and loss statement can help you weed out loss-making avenues to maximise returns.