ROI (Return on Investment)
A metric that measures the profitability of an investment by comparing the gain or loss to its cost, expressed as a percentage.
What You Need to Know
ROI is the most fundamental measure of whether an investment was worth it. The formula is simple: (Gain
- Cost) / Cost × 100 = ROI%.
Example: You invest $10,000 in stocks and sell for $12,000.
- ROI = ($12,000 - $10,000) / $10,000 × 100 = 20%
Why It Matters:
- Positive ROI: You made money (profit)
- Negative ROI: You lost money
- 0% ROI: You broke even
Real-World Applications:
- Solar panels: $20,000 cost, $30,000 in energy savings over 20 years = 50% ROI
- Education: $50,000 degree, $200,000 lifetime earnings increase = 300% ROI
- Home renovation: $30,000 kitchen remodel, $20,000 home value increase = -33% ROI (loss)
Limitations: ROI doesn't account for time (10% in 1 year vs. 10 years is vastly different) or risk. Use it as a starting point, not the whole story.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/return-investment
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.