Return on Investment

TIMES SQUARE SCENE IN NEW YORK CITY

TIMES SQUARE SCENE IN NEW YORK CITY

One of the most basic financial concepts is return on investment or ROI. Return on investment measures how much profit you have gained or lost (in percentage terms) by investing in stocks, mutual funds, bonds, a business venture, a bank account, or any other type of financial product. When you put your money in a bank account that pays interest, you are making a loan to the bank for which you get a small profit as interest. Your investment is the loan to the bank, and the return on your investment is the interest rate paid by the bank.

The return on investment for a stock is not guaranteed in the way that a bank deposit is. For stocks, the return on investment depends on how much stock prices increase after you’ve bought your shares. In general, the return of a stock and other investments that are held for one year can be calculated as follows:

ROI =  [(End Value - Beginning Value) / (Beginning Value)] x 100 

Where End Value is the price received for selling the investment.
Where Beginning Value is the price you paid when you purchased the investment. (We assume there are no fees charged by anyone who helped you buy or sell the investment).

So if you bought a share of stock for $50 and sold it one year later for $60, your return can be calculated as follows:


ROI =  [($60-$50) / ($50)] x 100 = [($10) / ($50)] x 100 = 20% per year

Return on investment gets slightly more complicated if you hold the investment for less than one year or for longer than one year. We will spare you the agony of the mathematics here.