Monday, September 21, 2015

How To Calculate Return On Investments (ROI)On International Stocks

Lately I've been keeping track of the Australian dollar for a few reasons. Not because I'm going on a holiday overseas but for more mundane reasons such as investing. We bought Apple shares a few weeks back and have yet to add Google stocks into our portfolio. Travelling overseas more frequently would be nice, of course =)

I've been checking out a site that has a few popular currencies readily converted. As an example, let us use today's AUD foreign currency exchange rate, 1 AUD buys $0.71 USD.

Calculating the return on investment (ROI) on foreign owned stock involves:
1. Calculating the ROI on the actual stock
2. Calculating the ROI on the stock taking into account, the stock price movement and the currency conversion movement

Bear with me as I dislike rounding up or down when doing my calculations. It's a bit confusing to explain because, firstly it involves working out returns as per usual, and then converting the return to your local currency. Let us ignore brokerage fees as it will just complicate this, however note that brokerage fee will reduce your ROI.

1)Calculating your foreign stock purchase:
Buying the foreign stocks:
If you have $10,000 AUD to buy Apple stocks at yesterdays closing price of $115.21 USD, AUD to USD exchange rate is 1 AUD buys $0.71 USD

$10,000 AUD*$0.71= $7,100 USD
$7,100 USD/$115.21 = 61 Apple (AAPL) stocks, rounded down

Total cost of AAPL portfolio is precisely 61*$115.21 USD = $7,027.81 USD
Total cost of $7,027.81 USD = $9,898.32 AUD

So if you have $10,000 AUD to buy AAPL stocks at $115.21 USD, you can afford to buy 61 stocks at $115.21 USD and it will cost you $9,898.32 AUD

A)Calculating the ROI on the actual stock:

If for example next week, AAPL's price appreciated to $120 USD and $1 AUD depreciated to buying only $0.69 USD, let's calculate the ROI:

ROI on AAPL stock without currency movement is 4.157%:

$120 USD-$115.21 USD = $4.79 USD increase per stock
$120 / $115.21 = 4.157% return

B) Calculating the ROI on the stock taking into account, the stock price movement and the currency movement:

So if AAPL price went up to $120 USD and the AUD depreciated to $1 AUD=$0.69 USD, the ROI is 7.176%

Your portfolio in AUD is now worth $10,608.69:

(61 AAPL * $120 USD)= $7,320 USD
$7,320 USD/ $0.69 = $10,608.69 AUD
$10,608.69AUD / $9,898.32 AUD = 7.176% ROI

So the total return on investment after accounting for stock and currency movement is 7.176% 

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