Investment Return (ROI) Calculator
Investment Analysis
How to Calculate Investment Return: A Comprehensive Guide
Understanding your investment performance is crucial for long-term wealth building. Whether you are trading stocks, holding real estate, or investing in a small business, knowing your Return on Investment (ROI) helps you compare different assets and make informed financial decisions.
The Basic ROI Formula
At its simplest, ROI is a ratio that compares the gain or loss from an investment relative to its cost. The standard formula is:
Calculating Total Return (Including Income)
Many investments, like stocks or rental properties, generate cash flow in the form of dividends or rent. To get an accurate picture, you must include this income in your calculation:
- Initial Investment: The total amount of money you originally paid.
- Final Value: The current market price of the asset.
- Dividends/Income: Any cash received during the holding period.
Total ROI Formula: [(Final Value + Income – Initial Cost) / Initial Cost] x 100
Understanding Annualized Return (CAGR)
Simple ROI doesn't account for time. A 50% return over 2 years is much better than a 50% return over 10 years. Annualized ROI, or Compound Annual Growth Rate (CAGR), standardizes the return to a one-year period, allowing you to compare investments held for different lengths of time.
Practical Example
Imagine you bought shares of a company for $10,000. After 3 years, the shares are worth $14,000, and you received $600 in total dividends.
- Net Profit: ($14,000 + $600) – $10,000 = $4,600
- Total ROI: ($4,600 / $10,000) x 100 = 46%
- Annualized Return: Using the CAGR formula, this results in approximately 13.44% per year.