What is Return on Investment (ROI)?

Return on investment or ROI, is a method of gauging the performance and efficiency of an investment you have made. ROI measures the net benefit of your initial investment.

ROI Formula

ROI = (current value of investment - cost of investment) / cost of investment

Example

Let's say you have invested $1,000 in "Awesome Tech Company Inc". You held on to these shares for one year, by which time they were worth $1,400. Using the formula above, we subtract $1,000 from $1,400 giving us $400. Divide $400 by the initial investment of $1,000, which then gives us 0.4. To convert that into percentage points, all we have to do is multiply 0.4 by 100, and that is 40% - that is our ROI.

ROI is a good way to understand how profitable investments are and can provide you with the tools to compare different investment options against one another.

ROI Caveats

Some investments are rather long-term in nature. They could vary between 5, 10, or even 30+ years. You may also want to incorporate "rate of return" - which takes in specific time frames into account, and "net present value" - which is used to adjust the value of money over a giving period of time when calculating ROI for long periods of time.