Negative Return
What It Is:
A negative return is a loss on an investment.
How It Works/Example:
For example, if an investor buys $1,000 of Company XYZ stock and then sells it for $500, the investor has a negative return of 50%.
Similarly, an investor will realize a negative return if the money borrowed to make an investment has a higher interest rate than the rate of return on the investment itself. For example, if you use a mortgage with a 5% interest rate to buy a house that only increases in value by 2% a year, you will have a negative return on your investment.
Why It Matters:
Clearly, every investor wants to avoid negative returns. In some cases, negative returns on certain investments create tax deductions or reductions, but from a cash perspective a negative return means outflows exceed inflows either immediately or over time.
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Cached on May 23, 2012, 6:27 pm