What is Yield in the Stock Market? Definition, Calculations and Examples.

In the stock market, yield refers to the amount of income that an investor can expect to receive from a security, such as a stock or bond, expressed as a percentage of the security's price.

Understanding Yield

• Yield is the return on investment that an investor can expect to receive from a security.
• It is calculated as a percentage of the security's price.
• Yield can be in the form of dividends or other distributions.

Calculation of Yield

Yield can be calculated in different ways, depending on the type of security being considered.

Yield Calculation for Stocks

• The yield on a stock is typically calculated using the stock's dividends per share and its current market price.
• Formula: Yield = Dividend / Price

Yield Calculation for Bonds

• The yield on a bond is typically calculated using the bond's interest rate and its current market price.

Relationship between Yield and Stock Price

• Yield is not the same thing as stock price.
• Stock price is the current market value of the stock.
• Yield and stock price can move independently of each other.

Example Calculation

Suppose you have a stock that currently trades at $100 per share, and the stock has a dividend of$2 per share. To calculate the yield on this stock:

Yield = Dividend / Price

Yield = $2 /$100

Yield = 2%

In this example, the yield on the stock is 2%, which means that an investor who buys the stock at its current price can expect to receive 2% of the stock's price in the form of dividends or other distributions during the course of a year.

Conclusion

Yield is an important factor for investors to consider when deciding whether to buy a particular security. However, it should not be the sole determining factor, as other factors such as risk and potential for capital appreciation should also be taken into account.