Return on Investment (ROI)
Net profit as a percentage of the capital invested. The universal yardstick for comparing investment performance.
Formula
ROI = (Net Profit / Cost of Investment) × 100
Return on Investment (ROI) measures the profitability of an investment relative to its cost. It is the simplest and most widely used metric for comparing the efficiency of different investments.
ROI does not account for time. A 50% ROI over 10 years is far less impressive than 50% in 1 year. To account for time, use annualized ROI or the CAGR (Compound Annual Growth Rate).
ROI also ignores risk. Two investments with the same ROI but different volatility are not equal — the risk-adjusted return (e.g. Sharpe ratio) gives a more complete picture.
Example
You invest $5,000 in a stock and sell it later for $6,500. Net profit = $1,500. ROI = ($1,500 / $5,000) × 100 = 30%. Compare that to a different trade where you made $300 on a $5,000 investment (6% ROI) — same dollar amounts deployed, very different results.
Related Terms
Benchmark
A standard index or rate used to evaluate investment performance — the S&P 500 is the most common equity benchmark.
BeginnerCapital Gain
The profit made when you sell an asset for more than you paid. Short-term and long-term gains are taxed differently.
BeginnerPortfolio
The complete collection of investments you hold — stocks, bonds, cash, and other assets together.
BeginnerReturn on Equity (ROE)
Net income as a percentage of shareholders' equity. Measures how efficiently a company turns shareholder capital into profit.
IntermediateYield
The income generated by an investment expressed as a percentage of its price. Used for bonds, dividends, and savings.
Beginner