What Is the Holding Period Return

Holding period return or HPR is a significant factor of finance that helps investors measure their total return on investments when kept for a certain period of time. The HPR considers both capital gains and losses achieved throughout the investment. The HPR provides investors with a simple method of determining the profit made from their investments at different times. In the realm of investments, an investor needs to have a complete understanding about what is the holding period return, how it is calculated, its advantages, limitations, and more.  In this article, let us learn all the mentioned aspects of the holding period.

How Is Holding Period Return Calculated?

HPR is used to determine the investments lost or gains investments over time. It is a helpful component that helps investors compare returns gained on different assets bought at different periods. The holding period return periods are calculated using the formula- HPR = Income + (Vn– Vo)/Vo.

Where:

Income = Cash Flows from the Investment

Vn = End of Period Value

Vo = Initial Value

 Step-by-Step Explanation on How to Calculate HPR Using Formula

• Determine the initial price of the investment, at which it was purchased.
• Determine the end price of the investment, which is at the end of the holding period.
• Calculate and note down the income earned through investment and add it to the profits or dividends made during the holding period.
• Now use the formula and input the values in the HPR formula to determine the value of HPR.

Let us learn the formula with an example:

Let us assume you bought a stock for 100 INR, later sold it for 120 INR, and earned 5 INR as dividends, in this case, the calculation based on the HPR formula will be:

HPR = Income + (Vn– Vo)/Vo

HPR = 5 + (120-100)/100

HPR = 5+ 20/100

HPR = 0.25 or 25%

This states the investment grew by 25% during the holding period.

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Why Is HPR Important for Investors?

Now that you know what is the holding period return, let’s understand its significance. HPR is an important metric of finance that allows investors to have a complete overview of the financial performance of their different assets or investments. It helps investors calculate the performance and profitability of their investments over time. It also helps investors to compare their stock performance profitability over 6 years to another investor's profitability in the same stock which is held only for the last 6 months' profits.

The HPR is a straightforward formula that helps investors evaluate the performance of both short-term and long-term investments. HPR is a useful financial component that helps investors determine how much profit the investments are making, which eventually helps them in making smart financial choices or decisions.

In short, HPR helps investors with a better understanding of risk and rewards, helps them evaluate their investment's market performance, compare different investments, and improve their strategies and investment decisions.

Factors Affecting Holding Period Return

Along with learning what is the holding period return, it is also essential to understand the factors affecting it. Many factors can affect the holding period return of an investment. A few of them are listed below:

Performance of Company

The financial performance of a company wherein the money is invested has a direct connection with HPR. When a company performs well in the market, earns more money, and pays dividends, it is likely to enhance investment returns. These conditions are vice versa when a company performs poorly and results in a loss of returns on investments.

Holding Periods Return Periods

The longer the holding period's duration the better you are likely to get the returns on your investment. Investments on holding periods for more than 12 months fall under long-term gains and are eligible for tax benefits. Whereas investments held for less than 12 months are categorized as short-term gains and it is not eligible for tax benefits.

Interest Rates

Any changes in the interest rates are likely to influence the returns of bonds and other interest-related investments. When the rate of interest increases, there is usually a drop in the prices of bonds. Thus, impacting the total returns of your investments and HPR.

Trends

Investments focused on specific industries or sectors are more prone to encounter risk and trends related to those sectors. Consumer preferences, changes in the company’s rules and regulations, and technological advancements can influence the holding period return.

Applications of Holding Period Return

Now that you have understood what is holding period return, let us explore various applications where HPR is used:

Performance Analysis

Investors can compare various investments assets that differ in holding periods using the HPR.

Risk Management

Investors use HPR to determine the risks that are associated with the investment, it gives a clear understanding of investment returns related to the holding periods.

Investment Comparison

Several investments with different holding periods can be easily compared using the HPR.

Decision Making

HPR helps investors to have a clear understanding of which stocks to hold on to and which to sell, thus helping them make an informed decision.

Advantages and Disadvantages of Holding Period Return

There are various advantages and some disadvantages of using HPR, a few of them are listed below.

Conclusion
A valuable and useful financial tool is the best term to define holding period return. It helps assess the total gain on their investment over a period of time. HRR offers transparency about the performance of investments. Inventors can compare various portfolios and make better investments. However, there are certain limitations as it only shows results based on initial and ending prices without considering the fluctuations. Hence, investors should carefully optimise their strategies and use a reliable stock market app to invest in different financial instruments.