When a person invests money in stocks, bonds and other assets, he forms what it known as an investment portfolio. When the person invests speculatively, he may expect to receive a certain amount of money back on the money he invested. This figure, know as his return on investment, can be given in the form of a single dollar amount or as a percentage of the total investment.
Return on Investment
When a person has a portfolio, he can measure the return he receives on his investments by comparing the amount of money he invested to purchase the investments with the value of his investments at a later point in time. This is because the investments that he purchased will likely not keep their same value over a long period of time, but will appreciate or depreciate depending on the investment climate.
There are two ways in which a person can measure how much money he has made or lost on his investments. First, the person can measure the difference between the amount of money he invested and the total value of his investments currently. However, a more effective gauge of a portfolio's performance is to measure this difference as a proportion of the portfolio's total original value, thus providing a percentage of the portfolios increase or decrease in value.
For example, if a person initially invested $10,000 into his portfolio and then saw the value of his investments grow to the point where they were worth $15,000, he could measure his return in two ways. First, the person could state that he had made $5,000. Second, the person could say that he realized a 50 percent return on his portfolio, as his portfolio is worth 150 percent of what it was originally.
When a person receives a percentage return on his investment, in can be calculated in various ways depending on the variables he uses in making the calculation. For example, a person can choose to include his brokers fees in the calculation, thus lowering his percentage. In addition, the person may choose to factor in inflation, thus also generally lowering the percentage as money becomes less valuable over time.
- "Investing For Dummies"; Eric Tyson; 2008