Return on investment is the most common way to measure whether money you put to work paid off. It's simple, universal and lets you compare wildly different investments on the same scale — but knowing its limits matters just as much as the formula.
The basic formula
ROI = (final value − amount invested) ÷ amount invested, expressed as a percentage. A positive ROI is a profit; a negative one is a loss. Its simplicity is why it's used everywhere from stocks to marketing campaigns.
Why annualized return matters
A 50% total return sounds great — but over 10 years it's mediocre, and over one year it's excellent. The annualized return normalizes for time, so you can compare a two-year investment against a ten-year one fairly. Always annualize before comparing.
What ROI leaves out
ROI says nothing about risk, timing of cash flows, or inflation. Two investments with identical ROI can carry very different risk. For investments with multiple deposits and withdrawals, measures like IRR capture the timing that simple ROI misses.
Frequently asked questions
ROI = (final value − amount invested) ÷ amount invested × 100. For example, turning $10,000 into $15,000 is a $5,000 profit, or a 50% ROI.
It's the equivalent steady yearly return: annualized = (final ÷ initial)^(1/years) − 1. It lets you fairly compare investments held for different lengths of time.
It depends on the asset and risk. As a reference, the stock market has historically returned roughly 7–10% per year on average over the long run. Always weigh return against the risk taken.
Only if you include them. For an accurate figure, add fees and commissions to your cost basis and, ideally, calculate returns after taxes.