Return on investment, or ROI, is one of the most important measures of economic success or failure. ROI measures the profitability of an investment and also provides a factor for comparison with other investments. The higher the ROI, the higher the potential profitability. Of course, like other economic figures, ROI can be calculated in different ways, so make sure that you always understand how the ROI is calculated before you decide to invest. Generally speaking, ROI uses a simple formula that requires only a few basic figures.
1. Record the cost of your investment. For example, let's say you purchase 30 shares in a company at $10 per share. The cost for your investment would be $300.
2. Record the gain of your investment. For example, let's say you sell your shares for $350.
3. Subtract the initial cost of your investment from your gains. To continue the example, you would subtract $300 from $350 to get a result of $50. This number represents your total gain.
4. Divide the total gain by the initial cost. In the example, you would divide $50 by $300 and get a result of approximately 0.17.
5. Convert the decimal to a percentage by multiplying it by 100. In our example, the result would be 17 percent. This percentage represents your ROI.
6. Check your work by multiplying the initial cost of the investment by the ROI plus one. Keep the ROI in decimal form. The result should be the first figure you used for gains in the formula. In the example, you would multiply 1.17 by 300, which is approximately $350.
Items you will need
- Investopedia: Return on Investment (ROI) Definition
- Return on Investment Basics; Patricia Pulliam Phillips and Jack J. Phillips
- Investopedia: FYI on ROI: A Guide to Calculating Return on Investment