ROI measures how much you have gained or lost on an investment relative to its cost, expressed as a percentage of the amount invested.
Return on investment, or ROI, is a simple measure of profitability. It tells you what percentage you have earned or lost on the money you put in.
The formula is straightforward: ROI = (current value − cost basis) ÷ cost basis × 100. If you invested $1,000 and your holding is now worth $1,250, your ROI is 25%.
ROI is useful for comparing very different investments on equal footing, because it normalises returns to a percentage regardless of the dollar amounts involved. However, basic ROI ignores time, so a 25% return over one month is far better than the same return over five years.
For that reason, investors often pair ROI with annualised return figures to compare opportunities fairly over different holding periods.
Suppose you put $2,000 into an asset and it later grows to $2,600. Your ROI is ($2,600 − $2,000) ÷ $2,000 × 100 = 30%. If that gain took three years, the annualised return is roughly 9% per year, which gives a fairer comparison against other opportunities.
There is no universal figure, because a good ROI depends on the asset, the risk taken and the time involved. A 10% return over one month is very different from 10% over five years, so always weigh ROI against the holding period and risk.
ROI is the total percentage gain or loss over the whole period you held an investment. Annualised return converts that into an average yearly rate, which makes investments held for different lengths of time directly comparable.
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