ROI is a financial metric typically expressed as a percentage or ratio that measures the profitability of your investment(s) over time.
Your ROI, or return on investment, is a financial metric – typically expressed as a percentage – that measures the potential and actual profitability of your investment(s) over time. A working familiarity with ROI is important for self-directed investors especially, as ROI can help inform investing decisions and shed light on which investments under- or overperformed.
We’ll cover a few examples of ROI that demonstrate the importance of investing early in a minute. But first, let’s take a look at the base calculations.
The function of ROI is to produce a ratio that represents the percentage loss or gain of your investment. You can calculate several types of ROI – but for our purposes, we’re just going to look at the basic formula:
Let’s break this down a bit. Say that you purchase 100 shares of iLuvDogs stock at $1.50 apiece for a total investment of $150. Then, you sell your position one year later at $5 apiece, or $500 upfront. To calculate your ROI, you would plug your variables into the above formula like so:
Or to simplify the equation:
Of course, your calculations will rarely be this simple. More complex ROI formulas can include factors like investing costs (commissions, brokerages fees, etc.), taxes, earned dividends, the effects of compounding, etc. The base outline for these equations looks like this:
In this equation, you add or subtract any relevant returns or costs on the top line to figure your net return, depending on which type of ROI you want to calculate.
There you have it. Now you can take a look at your own investments and determine your ROI or reassess your strategies.
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