Investment ROI Calculator
Understanding Return on Investment (ROI)
Return on Investment (ROI) is a fundamental metric used to evaluate the profitability of an investment. It measures the gain or loss generated on an investment relative to its cost. In simpler terms, it tells you how much money you've made (or lost) for every dollar you've invested. A positive ROI indicates a profitable investment, while a negative ROI suggests a loss.
Why is ROI Important?
ROI is a crucial tool for investors because it allows for a standardized comparison between different investment opportunities. Whether you're considering stocks, real estate, or starting a business, ROI provides a clear, quantifiable measure of performance. It helps in:
- Decision Making: Comparing potential investments to choose the most lucrative ones.
- Performance Evaluation: Assessing the success of past investments and identifying areas for improvement.
- Goal Setting: Setting realistic financial targets for investments.
How to Calculate ROI
The basic formula for calculating ROI is:
ROI = [(Current Value of Investment – Cost of Investment) / Cost of Investment] * 100
This formula gives you the percentage return over the entire period the investment was held.
Calculating Annualized ROI
While the basic ROI tells you the total return, it doesn't account for the time the investment was held. To get a better sense of the investment's performance per year, you can calculate the annualized ROI. The formula for this is:
Annualized ROI = [(1 + Total ROI)^(1 / Number of Years)] – 1
Where Total ROI is expressed as a decimal (e.g., 50% ROI is 0.50).
Example Calculation
Let's say you invested $10,000 (Initial Investment) in a stock. After 3 years (Time Period), the stock's value has grown to $15,000 (Current Value).
- Cost of Investment: $10,000
- Current Value of Investment: $15,000
- Time Period: 3 Years
Step 1: Calculate the total profit.
Profit = Current Value – Initial Investment = $15,000 – $10,000 = $5,000
Step 2: Calculate the total ROI.
Total ROI = (Profit / Initial Investment) * 100 = ($5,000 / $10,000) * 100 = 50%
This means your investment has grown by 50% over 3 years.
Step 3: Calculate the Annualized ROI.
First, convert the Total ROI to a decimal: 50% = 0.50
Annualized ROI = [(1 + 0.50)^(1 / 3)] – 1
Annualized ROI = [(1.50)^(0.3333)] – 1
Annualized ROI = [1.1447] – 1
Annualized ROI = 0.1447
Annualized ROI = 14.47%
This indicates that, on average, your investment has yielded approximately 14.47% per year.