What ROI measures
Return on investment (ROI) answers a simple question: for every unit of money you put in, how much did you gain or lose? It compares everything the investment gave back with what it cost you. Because it is a percentage, it lets you compare investments of different sizes: a gain of 3,000 on 10,000 and a gain of 30,000 on 100,000 are both a 30% return.
Amount returned = final value + income received − costs paid
Net profit = amount returned − amount invested
ROI = net profit ÷ amount invested × 100
The final value is what the investment is worth today, or what you received when you sold it. Income is cash you collected while holding it, such as dividends, interest or rent. Costs are fees, commissions and taxes you paid that are not already deducted from the final value. Choose the currency of your amounts in the calculator; it only sets the unit and converts nothing.
Worked example
Suppose you invest 10,000 and two years later the investment is worth 13,000:
- Net profit: 13,000 − 10,000 = 3,000
- ROI: 3,000 ÷ 10,000 = 30.00%
- Annualized return: (13,000 ÷ 10,000)1 ÷ 2 − 1 ≈ 14.02% a year
Now add 500 of dividends received and 100 of trading fees. The amount returned becomes 13,000 + 500 − 100 = 13,400, the net profit 3,400 and the ROI 34.00%. Over the same two years that is an annualized return of about 15.76%. Leaving out income makes a dividend-paying investment look worse than it was; leaving out costs makes every investment look better.
Why the annualized return matters
ROI says nothing about time. A 30% gain is excellent over one year and modest over ten. The annualized return turns the total into the constant yearly rate that would have produced the same result, so you can compare investments held for different periods:
Annualized return = (amount returned ÷ amount invested)1 ÷ years − 1
The holding period can include fractions, for example 1.5 years for eighteen months. Leave it empty if you only want the total ROI. The annualized figure is the same quantity as the compound annual growth rate; the CAGR calculator shows it year by year.
Losses
If 10,000 invested returns only 8,500 after three years, the net result is −1,500, the ROI is −15.00% and the annualized return about −5.27% a year. A loss needs a larger gain to recover: after a 15% fall you need about 17.6% just to get back to where you started. If your costs are larger than everything you got back, the amount returned is negative and an annualized rate cannot be calculated.
Limits of ROI
- ROI assumes a single amount invested at the start. If you added or withdrew money along the way, the timing of those cash flows matters and a simple ROI can mislead; track each purchase separately or use your broker's time-weighted return.
- The result is nominal. It does not remove inflation, so a positive ROI can still mean a loss of purchasing power.
- Taxes count only if you enter them as costs. In the United States, how gains and investment income are taxed is explained in IRS Publication 550, Investment Income and Expenses.
- A past return is not a forecast. This page does not recommend any investment and is not investment advice.
