ROI (Return on Investment)

ROI measures the total return of an investment relative to its cost. It's the simplest way to evaluate investment performance.

Formula

ROI = ((Gain from Investment - Cost of Investment) ÷ Cost of Investment) × 100%

Example

You buy stock for $1,000 and sell for $1,500. ROI = (($1,500 - $1,000) ÷ $1,000) × 100% = 50%.

How to Interpret It

ROI doesn't account for time. A 50% ROI in 1 year is excellent; in 10 years, less impressive. For time-adjusted returns, use CAGR.

Simple ROI vs. Annualized ROI

Simple ROI ignores time entirely. Annualized ROI (CAGR) adjusts for holding period:

Simple ROI: ($300K - $200K) ÷ $200K = 50%
Annualized (10 years): (300÷200)^(1/10) - 1 = 4.14% per year
Annualized (2 years): (300÷200)^(1/2) - 1 = 22.47% per year

Same 50% total return, vastly different annual performance. Always annualize when comparing investments held for different periods.

Real-World Examples

Stock purchase: Bought 100 shares at $20 ($2,000), sold at $26 ($2,600). ROI = ($2,600 - $2,000) ÷ $2,000 = 30%.
Stock with dividends: Bought at $50, sold at $60, received $2 dividends. ROI = (($60 - $50) + $2) ÷ $50 = 24%.
Real estate: Bought for $300K, sold for $360K after 3 years. Simple ROI = 20%. Annualized ROI = 6.27%.

Common Mistakes

Ignoring time horizon: Comparing a 50% ROI over 1 year vs 10 years without annualizing is meaningless.
Forgetting transaction costs: Trading fees, taxes, and commissions reduce actual returns. A $2,000 investment with $50 in fees starts at $2,050 cost basis.
Not including dividends: For dividend stocks, excluding dividends understates true ROI significantly.
ROI vs. IRR confusion: ROI is simpler but ignores cash flow timing. IRR (Internal Rate of Return) accounts for when money goes in and out — critical for investments with multiple contributions.

Pro Tips

Always annualize: When comparing any two investments, convert both to annualized returns. This makes stocks, bonds, real estate, and business investments directly comparable.

Include all costs: For stocks, include commissions + bid-ask spread + taxes. For real estate, include closing costs + maintenance + property tax. The "real" ROI is always lower than the headline number.

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ROI vs Other Return Metrics

Metric	Best For	Limitation
ROI	Quick comparison of any investment	Ignores time period
CAGR	Annualized growth over multiple years	Assumes steady growth
ROE	How efficiently equity generates profit	Affected by debt levels
ROA	How well assets produce returns	Varies by industry
IRR	Complex cash flows with timing	Harder to calculate

Frequently Asked Questions

What is a good ROI for stocks?

The S&P 500 historically returns about 10% annually (before inflation). So a good ROI for stocks is anything above 10% per year. For real estate, 8-12% is typical. For a new business, investors often look for 15-30% ROI to compensate for higher risk.

What's the difference between ROI and profit?

Profit is the absolute dollar amount you earn. ROI is the percentage return relative to your investment. A $1,000 profit on a $5,000 investment is 20% ROI, but the same $1,000 on a $100,000 investment is only 1% ROI. ROI lets you compare investments of different sizes.

Does ROI account for the time held?

Basic ROI does not. A 50% ROI in one year is excellent, but 50% over ten years is mediocre. To compare across time periods, convert to an annualized return (CAGR) or use the CAGR formula.

Related Terms

CAGR ROE ROA