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What is Return on Investment?

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Understanding Return on Investment, its definition and calculations.

Description: A graph showing the return on investment of two stocks over time.

What is Return on Investment? Return on Investment, or ROI, is a measure of the profit or loss generated from an Investment relative to the amount of money invested in that Investment. It is often used to compare the performance of different Investment, as well as to determine the value of an Investment.

When calculating ROI, investors consider the cost of the Investment, the amount of money they’ve earned from their Investment, and the amount of time they’ve held the Investment. ROI is expressed as a percentage, and is calculated by dividing the amount of money earned from the Investment by the initial cost of the Investment.

For example, if an investor invests $100 in a stock and earns $20 in dividends over the course of a year, their return on Investment would be 20%, or $20/$100.

There are a variety of ROI metrics used to measure Investment success, ranging from simple ROI calculations to more complex metrics such as internal rate of return (IRR) or time-weighted return (TWR).

In addition to measuring the performance of an Investment, ROI is also used to compare the performance of different Investment. For example, if an investor is considering investing in two stock with similar returns, they can compare their ROI to determine which stock is the better Investment.

ROI is also used to evaluate the success of a company’s Investment in new products or services. For example, if a company invests in a new technology, they can calculate the return on Investment of that technology to determine if the technology is a worthwhile Investment.

ROI can also be used to measure the success of an Investment portfolio. By comparing the ROI of an individual Investment with the ROI of the entire portfolio, investors can determine which Investment are performing the best, and which Investment they should consider selling.

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