Why Traders Must Factor in the Cost of Money in PnL Calculations

When evaluating a trading strategy, most traders focus on asset performance—tracking stock price movements, dividends, or other returns. However, there’s a crucial component that is often overlooked: the cost of capital or the opportunity cost of holding cash.

Every trading strategy requires cash as a starting point, and ignoring the value of that cash can lead to misleading performance evaluations.

The Baseline: Comparing a Strategy to Cash

The most basic strategy any trader can have is holding cash. If you have $10,000 in cash, that money is not sitting idle—it can earn risk-free interest or be allocated to low-risk, high-yielding ETFs.

For example, if the risk-free rate is 5% per year, then simply holding $10,000 in cash would result in:

• $10,500 at the end of the year

• A $500 gain with zero volatility

The True PnL of a Stock Trade

Let’s say a trader decides to deploy the $10,000 in cash to buy stocks instead.

• Two financial actions occur:

  • Cash is "sold" – The trader no longer earns risk-free interest.

  • Stock is "bought" – The trader takes on market volatility.

At the end of the year, if the stock appreciates by 8% (including dividends):

• Stock return = $10,800 (8% increase)

• Lost risk-free return = -$500 (from missing the 5% cash yield)

• Net return of the strategy = $10,800 - $10,500 = $300 (3% effective return)

The key question every trader must ask:"Is the additional 3% return worth the risk and volatility?"

Many traders assume they are making an 8% return, but in reality, their true PnL should be measured against the alternative of holding cash.

How TTG's Histo Data Helps Traders Measure True Performance

In real-world markets, interest rates fluctuate, impacting the baseline risk-free rate. At TTG, we designed HistoApp to capture risk-free rates dynamically across multiple instruments, allowing traders to:

• Track historical interest rates for accurate benchmarking

• Compare strategy returns against a risk-free baseline

• Measure the true performance of trading strategies

By factoring in the cost of money, traders can make smarter, data-driven decisions about whether their strategy truly provides excess returns worth the risk.

Up Next: The Myth of "Stocks Always Go Up" – Why Timing Matters

Over a 50 or 100-year period, history shows that buying and holding stocks has been a winning strategy. But individual traders and investors don’t have a century to wait—we have finite lifespans, financial goals, and market cycles to navigate.

In our next blog, we’ll explore:

• Why long-term stock market performance doesn’t always translate to short-term success

• How timing impacts investment outcomes, even for long-term investors

• Why blindly holding stocks may not always be the best approach

The idea that "stocks always go up" is true over centuries—but is it true for you? Stay tuned.