Rate of Investment (ROI) Calculator
Calculate your investment performance and annualized growth rate.
Understanding Rate of Investment (ROI)
The Rate of Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It measures the amount of return on an investment relative to the investment's cost. Whether you are investing in stocks, real estate, or a business venture, knowing your ROI is critical for making informed financial decisions.
How to Calculate ROI
The basic ROI formula is straightforward:
ROI = [(Final Value – Initial Cost) / Initial Cost] x 100
However, simple ROI doesn't account for time. To compare investments of different durations, we use the Annualized ROI (CAGR) formula:
Annualized ROI = [(Final Value / Initial Cost) ^ (1 / Number of Years) – 1] x 100
Example Calculation
Imagine you invested $5,000 in a tech stock. After 4 years, the value of those shares grew to $8,500. During that time, you paid $100 in brokerage fees.
- Total Investment Cost: $5,000 + $100 = $5,100
- Final Value: $8,500
- Total Gain: $8,500 – $5,100 = $3,400
- Total ROI: ($3,400 / $5,100) x 100 = 66.67%
- Annualized ROI: [($8,500 / $5,100) ^ (1/4) – 1] x 100 = 13.62%
Why Annualized ROI Matters
While a 50% return sounds impressive, it matters significantly whether that return was achieved in 1 year or 10 years. Annualized ROI allows investors to compare the performance of various assets on an apples-to-apples basis over a standardized one-year period.