Written by What Is Return on Investment (ROI)?
- Definition: ROI is a metric used to evaluate the profitability of an investment. It measures the return relative to the cost of the investment.
- Formula: The basic formula for ROI is: ROI = (Net Profit / Cost of Investment) * 100
- Example: If you invest $1,000 in a stock and sell it for $1,200, your ROI is 20% because you made $200 on your $1,000 investment.
Other Important Return Metrics
- Annualized Return: This metric shows the average return per year over a period, accounting for compounding. It is useful for comparing investments with different time frames.
- Total Return: Total return includes not just capital appreciation but also dividends or interest earned from the investment.
- Compound Annual Growth Rate (CAGR): CAGR measures the mean annual growth rate of an investment over a specified period longer than one year.
How to Estimate Future Returns
- Historical Data: Reviewing historical performance of similar investments can give you an estimate of future returns. Keep in mind that past performance is not always indicative of future results.
- Risk-Adjusted Returns: Consider not only the returns but also the risks involved. Investments with higher potential returns generally come with higher risks.
- Using Tools and Calculators: Online investment calculators can help you estimate the potential return based on your input parameters like initial investment, time horizon, and expected return rate.
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