What is ROI?
It’s a popular method to measure the profitability and efficiency of an economic entity. When it comes to your own personal investments, it serves as a useful indicator to compare and rank different investments within a portfolio. The logic follows that the higher the ROI, the more profitable (and therefore effective) an investment is. So clearly, we want our investments to have a high ROI!
KEY TAKEAWAYS
- ROI (Return on Investment) is a useful measure of profitability
- It enables investors to assess the level of returns made through an investment by measuring net income against its original cost over a period of time
- The higher the ROI, the more profitable an investment is
- Anywhere from 7 to 10% is usually considered a good ROI for long-term investors
How to calculate ROI?
To calculate ROI, the net profit of an investment is divided by the initial cost of the investment, which is then expressed as a percentage or a ratio.
Return on investment formula
ROI = ( Current Value of Investment - Cost of Investment ) / ( Cost of Investment )
Return on Investment Examples:
If you bought a house for $700,000 and proceeded to sell it for $900,000, you gain a profit of $200,000 (net profit). If you then divide the net profit ($200,000) by the cost of your total initial investment ($700,000) and then multiply by 100, your total ROI percentage ends up being 28.5%.
Similarly, if you invested $5,000 into Apple stocks and after 12 months find they’re up to $5,500, you have earned a net profit of $500. If you divide the net profit ($500) by the cost of your investment ($5,000) and multiply by 100, your total ROI percentage ends up being 10%.
What is a good ROI?
When it comes to your own stocks, anywhere from 7 to 10% is usually considered a good ROI for long-term investors. However much we would like a 20%, 30% or even 40% return, it’s pretty significant in the world of investing. If you have a high risk appetite and are comfortable in trading in volatile investments, then something higher than 10% is possible. But it’s important to know your limits and to be realistic!
