ROI Calculator for Stock Investments
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Understanding Stock Investment ROI
Return on Investment (ROI) is a fundamental metric used to evaluate the profitability of an investment relative to its cost. For stock investments, it helps you understand how much you've gained or lost on your capital over a specific period.
How to Calculate Stock ROI:
The basic formula for ROI is:
ROI = ((Current Value - Initial Investment) / Initial Investment) * 100%
This gives you the percentage return on your investment. A positive ROI indicates a profit, while a negative ROI signifies a loss.
Annualized ROI: For a Better Comparison
While simple ROI is useful, it doesn't account for the time your money was invested. To compare investments held for different durations, it's better to calculate the Annualized ROI. This standardizes the return to a yearly basis.
The formula for Annualized ROI is:
Annualized ROI = ((1 + ROI / 100)^(1 / (Time Period in Years))) - 1
Where:
- ROI is the simple ROI calculated above.
- Time Period in Years = Time Period in Months / 12
Annualized ROI is crucial for understanding the effective yearly growth rate of your stock portfolio, making it easier to benchmark against other investment opportunities.
Example Calculation:
Let's say you invested $1,000 in a stock (Initial Investment).
After 18 months (Time Period of 1.5 Years), the stock's value has grown to $1,500 (Current Value).
Simple ROI:
ROI = (($1,500 – $1,000) / $1,000) * 100% = ($500 / $1,000) * 100% = 50%
Annualized ROI:
Time Period in Years = 18 months / 12 = 1.5 years
Annualized ROI = ((1 + 50 / 100)^(1 / 1.5)) – 1
Annualized ROI = ((1 + 0.5)^(0.6667)) – 1
Annualized ROI = (1.5^0.6667) – 1
Annualized ROI ≈ 1.3104 – 1
Annualized ROI ≈ 0.3104 or 31.04%
This means your investment effectively grew by approximately 31.04% per year over the 18-month period.