Stock Returns and the Price You Paid

When a company issues brand-new shares, the money goes to the company. It becomes working capital, research, expansion. This is the primary market. When a shareholder sells an existing share to you, the money goes to that shareholder, not to the company. This is the secondary market. Companies that are already listed can still issue new shares, and shares can change hands before listing too. The difference matters because the recipient changes.

A useful way to see the scale: a company valued at 90 million yuan before a round takes in 10 million yuan of new investment. Its value after the round is 100 million yuan, and the new investor holds 10% of the company, assuming all the new money buys shares with the same rights as the existing shares. If the original owner had simply sold a slice of their own holding, that cash would have landed in their pocket instead.

Keep the case simple: one share, held the whole period, no splits, no top-ups, no reinvested dividends.

Holding-period return = (end-of-period share price − purchase price + dividends paid during the period) ÷ purchase price.

That is the pre-fee, pre-tax figure; a real account adds whatever costs and tax your actual transactions incurred.

Walk through it. Buy at 100 yuan. A year later the share trades at 103 yuan and you collected 3 yuan in dividends. Your return is (103 − 100 + 3) ÷ 100, which is 6%.

Dividends are easy to forget because they show up as a transfer, not a price change. But the company genuinely moved cash from its own account to yours, and on the ex-dividend date, the reference price is adjusted for the distribution; the actual trading price also reflects market movements. Count the cash and the price together, and you count the whole result exactly once.

The business takes in revenue from its products and services, pays wages, purchases inputs, interest and tax, and the remaining accounting result is profit. Actual cash flow also depends on collection and payment timing. Part of that cash can be paid out to owners. Part stays inside the company, and if it funds something that earns more later, buyers are often willing to pay more for every share.

Your question as an owner is narrower: what lands on your share? A company's total profit can rise while it issues more shares too, and then earnings per share may grow less than total profit. If profit and the relevant share count both double, earnings per share stays unchanged. Compare earnings per share using consistent reporting periods and share-count calculation methods. The company's results, its payout choices, and its share count together decide what one share represents of the outcome. The arrangements behind that sit in Who Creates Value, and Who Gets Paid.

How the Purchase Price Changes the Result

For a company with positive earnings per share, the price you pay can be written as:

Share price = earnings per share × P/E ratio.

The multiple says how much investors agree to pay for one yuan of earnings. It shifts with growth expectations, with how long they trust the earnings to last, and with the return they demand for taking the risk. That last piece is where surprises hide. Here is a teaching example:

Earnings grew by 20%. The share price fell by 10%. Add the 2 yuan dividend you collected, and your total return is (90 − 100 + 2) ÷ 100 = −8%. The market stopped being willing to pay twenty yuan per yuan of earnings and settled on fifteen. The verdict cost more than the growth produced.

Before trusting the earnings figure inside a multiple, check it. One-off profits, a cyclical peak, a change in share count, all of these reshape the per-share number underneath. When judging any price, weigh three things against each other: what cash the business can realistically produce for owners, how much it has to keep spending to keep doing that, and what you're paying today. Only then can you see where the expected return is supposed to come from.

1. What activity keeps generating cash for this company?
2. Of what that activity produces, how much actually reaches the shares you hold?
3. At today's price, what results and what eventual selling price make the return work?

Once you have your return figured out, converting it into what you could actually buy after fees is the next step, covered in Compounding, Fees, and Real Purchasing Power. Holding a basket of shares through a fund changes the arithmetic again, see Fund Net Asset Value and Personal Investment Returns. And the whole reading path runs through Turning investment returns into actual gains. For a fund holding a basket of stocks, see the holding rules and trading-price discussion in Index Rules and Fund Trading Prices.