Profit and Loss “P&L”

What Do We Mean By Profit and Loss (P&L) For An Investment Portfolio?

A Profit and Loss calculation is to measure the amount of money earned or lost on the investment securities.  Assuming a client hasn’t contributed or withdrawn money from the portfolio, the profit and loss should be the change in value of the portfolio.

What is Included in a Profit and Loss?

Profit and loss will include:

  • Market movements (price changes) of the securities held from the beginning to end of the measurement period.  For example, let’s say you hold AAPL at the end of the day on March 3rd and you still hold it at the end of the day March 4th.  The price rises from $150 on March 3rd to $151 on March 4th.  Assuming you hold 100 shares, then the profit will be $1 * 100 shares = +$100.

  • The change in value of the investments bought during the measurement period, from the amount you bought them for (including transaction costs) to the ending value.  For example, if you bought 1,000 shares of IBM $125 per share including transaction costs, and it closes that day at $124, then your loss on that day from this security is -$1,000.

  • The change in value of the investments sold during the measurement period, from the value of them at the beginning of the period to the sale price, net of transaction costs.  For example, if you sold 100 shares of HPE for $15 per share net of any transaction costs, and it closed at $14 the prior day, then your profit and loss today +$100.

  • Accruals of interest or dividends.  If any dividends go ex during the period you are measuring P&L, the stock price will drop and you will need to account for any profit from the dividends that were earned.  After ex date, the dividend value will not change unless it is denominated in a different currency from the base currency of the portfolio.  Interest on bonds will grow each day, so the accrued interest will contribute to performance.

  • Any gains or losses resulting from corporate actions such as a tender offer.  For example, if you hold $1,000,000 face value of a bond priced at $103.00 (which equates to 103% of face value = position value of $1,030,000).  The bond is  tendered for a price of $104, which for $1,000,000 par is $1,040,000.  Therefore the profit is $1,040,000 – $1,030,000 = +$10,000.    For me, its easiest to always divide the price(s) by 100, and multiply that by the the face value, sometimes also called units of the bond.

  • Gains or losses from currency movements if you hold securities or cash in a currency other than the portfolios base currency.   For example, if your base currency is Euro and you hold 1,000 shares of a US stock.  The stock closed yesterday at $100 and closed today also at $100.  This means in US Dollars the position is $100,000 yesterday and today. The exchange rate yesterday was 1.25 USD / 1 EUR, so the EUR value was 80,000 yesterday and 80,645.16 today for a profit of $645.16 even though the stock price didn’t change.  This profit and loss is due to the fact that the security is being held by someone who would have to convert their account to EUR if they wanted to convert the securities to cash.

  • Proceeds from class actions

It excludes changes in value resulting from withdrawing from or depositing money into the portfolio, see the flows page for more details.

How Is Profit and Loss Calculated?

To measure the profit and loss of a portfolio you can either:

  1. Determine how much the “total market value” of the portfolio changed from the beginning to the end of the measurement period, and the subtract contributions/withdrawals, or

  2. Calculate the contribution to profits for each security (see list above for some of the items that this includes) and add those amounts to determine the total value change.

#1 can be much simpler, but #2 gives you the details by security if you wanted to perform attribution later on to see what each security contributed to the Profit & Loss.

 

Can You Show Me an Example?

For example, let’s take a portfolio consisting of stock A, bond B, and cash. At the end of day 1, stock A is worth $100, bond B is worth $100, and we have $100 in cash.   Therefore, the total starting market value of the portfolio is $300.  Next, we decide to take $50 from cash and buy more of stock A. At the end of the day 2, Stock A is worth $155 and Bond B is worth $102.

 

In this case, we were given the beginning value, ending value, and movement of funds (aka flows). As a Performance Analyst, you may need to derive the values and flows, and thus the P&L, from each security and trade. These topics are discussed in depth on other pages.

What is Gross P&L versus Net P&L?

You may hear the terms “Gross P&L” and “Net P&L.” In the performance world, the standard difference between the two is fees. However, there could be other definitions for gross and net so it is important to clarify the terminology if you are unsure.

“Gross” is defined as the number that is calculated before something is “netted out” or subtracted. For example, if fees are the only difference, then Gross P&L is the amount before fees are paid and Net P&L is the amount after fees are paid:
Net P&L = Gross P&L – Fees

If taxes are the difference:
Net P&L = Gross P&L – Taxes

 

 

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