Investment ROI Calculator
Understanding Investment Return on Investment (ROI)
Return on Investment (ROI) is a fundamental metric used to evaluate the profitability of an investment. It measures the amount of return on a particular investment, relative to the investment's cost. In simpler terms, ROI tells you how much money you've made (or lost) from your investment as a percentage of how much you initially put in.
Why is ROI Important?
- Profitability Assessment: It's the most straightforward way to gauge if an investment has been successful.
- Comparison Tool: ROI allows investors to compare the performance of different investments, even if they vary in size or duration.
- Decision Making: Understanding ROI helps in making informed decisions about where to allocate capital for future investments.
- Performance Tracking: It's crucial for tracking the performance of existing investments over time.
Calculating ROI
The basic formula for ROI is:
ROI = ((Final Value of Investment - Initial Investment Cost) / Initial Investment Cost) * 100
This formula gives you the overall percentage gain or loss. However, it doesn't account for the time duration of the investment. For investments held over different periods, it's often useful to calculate the annualized ROI.
Annualized ROI
Annualized ROI normalizes the ROI over a specific period, typically a year, making it easier to compare investments with different holding times. The formula is:
Annualized ROI = ((1 + ROI)^(1 / Investment Duration in Years)) - 1
Where 'ROI' in this formula is the decimal form (not percentage) of the overall ROI.
Example Calculation
Let's say you invested $10,000 (Initial Investment) in a stock, and after 5 years (Investment Duration), its value grew to $15,000 (Final Value).
- Step 1: Calculate Overall ROI
ROI = (($15,000 – $10,000) / $10,000) * 100 = ($5,000 / $10,000) * 100 = 0.5 * 100 = 50% - Step 2: Calculate Annualized ROI
First, convert the overall ROI to a decimal: 50% = 0.50
Annualized ROI = ((1 + 0.50)^(1 / 5)) – 1
Annualized ROI = (1.50^(0.2)) – 1
Annualized ROI = 1.08447 – 1 = 0.08447
Convert back to percentage: 0.08447 * 100 = 8.45% (approximately)
This means your investment yielded an average of 8.45% per year over the 5-year period. This calculator will help you quickly determine these figures for your own investments.