Return on Investment (ROI)

Return on Investment (ROI) shows how much profit or loss you have made on an investment — it is one of the simplest ways to measure performance.

What is Return on Investment (ROI)?

When you invest your money, you want to know: Was it worth it?
Return on Investment, or ROI, is one of the simplest ways to answer that question.

It shows how much profit (or loss) you have made compared to what you originally invested. Whether you are buying stocks, starting a business, or putting money into other types of assets, ROI helps you understand how well your money is working for you.

Why does ROI matter?

ROI is important because it gives you a clear, simple way to compare different opportunities. If you invest $1,000 in two different places — for example, one in a stock and one in a small business — ROI shows which one gave you the better return.

It also helps you make smarter decisions. If something has a low or negative ROI, it may not be the best place to keep your money. On the other hand, a strong ROI can signal a healthy investment.

Whether you are managing your own portfolio or just starting out, ROI helps you stay focused on what matters: growing your wealth over time.

How ROI works: the formula

The basic formula for Return on Investment is:

Formula:

ROI = (Gain – Cost) ÷ Cost

You then multiply the result by 100 to turn it into a percentage.

Let us break it down:

Gain is how much money you made from the investment.
Cost is how much you originally invested.

The difference between the gain and the cost is your profit.

For example: you bought shares for $1,000 and later sold them for $1,200.

The calculation looks like this:

ROI = ($1,200 – $1,000) ÷ $1,000 = 0.20 → 20%

This means you earned a 20% return on your investment.

Return on Investment works in many situations, not just stocks. You can use it to measure returns on real estate, side businesses, cryptocurrency, or even your education.

What ROI tells you (and what it does not)

ROI is a great starting point because it gives you a quick snapshot of how well your investment performed. If the number is positive, you earned a profit. If it is negative, you lost money. The higher the ROI, the more money you made compared to what you put in.

But ROI also has its limits. It does not tell you how long it took to earn that return. For example, a 20% ROI in one year is very different from a 20% ROI over ten years. That is why some investors also look at metrics like annualized return or IRR (Internal Rate of Return).

ROI also does not show risk. Two investments might have the same ROI, but one could be far riskier than the other. ROI only tells you the result — not the full story of how you got there.

How to use ROI in real life

Return on Investment is not just for professional investors. You can use it in many everyday financial decisions.

1. Buying stocks or ETFs
Imagine you invest $2,000 in an exchange-traded fund and sell it later for $2,400. Your profit is $400. That gives you a 20 percent Return on Investment. It helps you compare how well this investment performed compared to another one.

2. Starting a side business
You spend $500 on supplies and advertising for a small online shop and earn $700. Your Return on Investment is ($700 minus $500) divided by $500, which equals 40 percent. This tells you whether your business idea is financially working.

3. Real estate
You buy a property for $200,000, spend $50,000 on renovations, and sell it for $300,000. Your total cost was $250,000. The Return on Investment is ($300,000 minus $250,000) divided by $250,000, which equals 20 percent.

4. Education or skills
You pay $1,000 for a course that helps you find a better job with $5,000 more income per year. Even though this is not a stock or a property, the Return on Investment is still very high. You can use the same thinking to judge if the money you spent was worth it.

In short: Return on Investment helps you think like an investor. It encourages you to ask, “Is this worth the money, time, or effort I am putting in?”