return on investment
return on investment: Return on Investment (ROI) is a financial metric used to evaluate the efficiency of an investment by comparing the net profit generated to the initial cost of the capital deployed.
Plain-English Explanation
ROI measures how much money you made or lost relative to how much you spent. It is calculated by subtracting the initial cost from the final value, dividing that result by the initial cost, and multiplying by 100 to get a percentage. This standardizes performance, allowing you to compare disparate assets on a common scale of efficiency rather than just absolute dollar amounts.
Why It Matters
For serious investors, ROI provides a clear, quantifiable benchmark for capital efficiency. It helps distinguish between high-growth assets that may have consumed excessive capital and those that generated superior returns per dollar invested. By tracking ROI, you can assess whether your investment thesis held up against the cost of capital and identify which strategies truly add value to your portfolio over time.
Next Step
Review your recent holdings to calculate their historical ROI. Compare these figures against your initial investment thesis to determine if the outcome aligned with your expectations for risk and reward.
Examples
- Suppose you purchase 10 shares of a company at $50 each, totaling a $500 initial investment. After one year, the shares are worth $600, and you received $20 in dividends. Your total gain is $120 ($100 in appreciation + $20 dividends). The ROI is calculated as ($120 / $500) 100 = 24%. This 24% figure allows you to compare this performance against a risk-free bond or another stock to see which was more efficient.