Understanding Your Investment's Rate of Return
The Rate of Return (RoR) is a key metric for evaluating the profitability of an investment. It measures the gain or loss on an investment over a specific period, expressed as a percentage of the initial investment's cost.
How to Calculate Rate of Return:
The basic formula for calculating the simple rate of return is:
Simple Rate of Return = ((Current Value – Initial Investment) / Initial Investment) * 100
If you want to annualize this return (especially if the investment period is longer than one year), you can use the following formula:
Annualized Rate of Return = [((Current Value / Initial Investment)^(1 / Time Period)) – 1] * 100
In our calculator:
- Initial Investment Amount: This is the principal amount you first invested.
- Current Value (or Sale Price): This is the current market value of your investment, or the price you sold it for.
- Time Period (in years): This is the duration for which the investment was held, expressed in years.
Why is Rate of Return Important?
The Rate of Return helps you:
- Compare the performance of different investments.
- Assess whether an investment has met your financial goals.
- Make informed decisions about future investment strategies.
A positive Rate of Return indicates a profitable investment, while a negative one signifies a loss.
Example:
Let's say you invested $10,000 (Initial Investment) in a stock. After 2 years (Time Period), the stock is now worth $12,000 (Current Value).
- Simple Rate of Return: (($12,000 – $10,000) / $10,000) * 100 = (2,000 / 10,000) * 100 = 20%
- Annualized Rate of Return: [(($12,000 / $10,000)^(1 / 2)) – 1] * 100 = [(1.2^0.5) – 1] * 100 = [1.0954 – 1] * 100 = 9.54% (approximately)
function calculateRateOfReturn() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var currentValue = parseFloat(document.getElementById("currentValue").value);
var timePeriod = parseFloat(document.getElementById("timePeriod").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(initialInvestment) || isNaN(currentValue) || isNaN(timePeriod) || initialInvestment <= 0 || timePeriod <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
// Calculate Simple Rate of Return
var simpleRoR = ((currentValue – initialInvestment) / initialInvestment) * 100;
// Calculate Annualized Rate of Return
var annualizedRoR = (Math.pow((currentValue / initialInvestment), (1 / timePeriod)) – 1) * 100;
resultDiv.innerHTML =
"
Simple Rate of Return: " + simpleRoR.toFixed(2) + "%" +
"
Annualized Rate of Return: " + annualizedRoR.toFixed(2) + "% (over " + timePeriod + " year(s))";
}
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