Return on Investment (ROI)
What Is Return on Investment (ROI)?
Return on Investment (ROI) is a financial metric used to measure the gain or loss generated by an investment relative to its original cost. It is typically expressed as a percentage and helps investors evaluate how effectively their money is working.
ROI is one of the most widely used performance measures in investing, business, and personal finance because it provides a simple way to compare outcomes across different opportunities.
Why It Matters
ROI helps investors determine whether an investment produced a worthwhile return. It can be used to compare multiple investments, assess business decisions, or evaluate whether an asset is growing in value as expected.
Because ROI is simple and flexible, it is often one of the first numbers investors look at when reviewing performance.
How ROI Works
ROI is commonly calculated with this formula:
(Gain from Investment − Cost of Investment) ÷ Cost of Investment
The result is then expressed as a percentage.
ROI may include gains from:
- price appreciation
- dividends or interest
- business income
- proceeds from selling an asset
A positive ROI means the investment gained value, while a negative ROI means it lost value.
Example
An investor buys shares for $1,000 and later sells them for $1,150. The gain is $150. Dividing $150 by the original $1,000 cost gives an ROI of 15%.
ROI vs Rate of Return
- ROI is a general measure of profit relative to cost.
- Rate of return often refers more broadly to investment performance over a specific period, sometimes including annualized measures.
FAQs About ROI
Can ROI be negative?
Yes. A negative ROI means the investment lost money.
Does ROI include time?
Not by itself. ROI shows total gain or loss, but it does not automatically reflect how long the investment was held.
Why do investors use ROI?
Because it is simple and useful for comparing financial outcomes.
Related Terms
