What Is ROI?
ROI (return on investment) measures how much an investment has earned relative to what it cost. It is expressed as a percentage and is the fastest single-number way to compare opportunities.
ROI = (Gain on Investment โ Cost of Investment) รท Cost of Investment ร 100%
The gain on investment is what the investment is worth or has produced at the end; the cost of investment is everything you put in โ purchase price, fees, transaction costs. Thinking in profit, the same formula becomes:
ROI = Profit รท Cost ร 100%
where profit = final value โ cost.
Worked example: a stock
You buy 100 shares at $100 each (cost $10,000, commission $40). A year later you sell at $130 each ($13,000) and collected $5 per share in dividends ($500).
- Total received: $13,000 + $500 = $13,500
- Total cost: $10,000 + $40 = $10,040
- Profit: $13,500 โ $10,040 = $3,460
- ROI: $3,460 รท $10,040 = 34.46%
Worked example: real estate
You buy an investment property for $250,000 plus $8,000 in closing costs. After 5 years you sell for $300,000. Total profit = $300,000 โ $258,000 = $42,000.
ROI = $42,000 รท $258,000 = 16.28% over 5 years.
That number is harder to digest โ 16.28% over 5 years โ which leads to the next section.
ROI vs CAGR
ROI tells you the total return over your holding period, but not the annual pace. That is the job of CAGR (compound annual growth rate):
CAGR = (End Value รท Begin Value)^(1 รท years) โ 1
For the real estate example: ($300,000 รท $258,000)^(1/5) โ 1 = 3.06% per year. The 16.28% ROI over 5 years works out to only 3.06% compounded annually. Our CAGR Calculator turns totals like that into an annualized rate in one step, and the ROI Calculator handles the basic math including income such as dividends or rent. If you want to understand why compounding changes the picture, our compound interest guide walks through it with examples.
When to use which
- ROI โ a single holding period; comparing two opportunities that last the same length of time.
- CAGR โ investments longer than one year, or comparisons between different holding periods.
- ROE (return on equity) โ a company metric: net income รท shareholders' equity. It measures profitability, not your total return on the money you put in.
Common ROI Mistakes
- Ignoring fees and transaction costs โ they reduce both profit and ROI, and they matter a lot on small investments.
- Comparing ROIs with different holding periods โ 20% over one year beats 30% over five years, because the latter is only a 5.39% CAGR.
- Forgetting income โ dividends and rental income are part of the gain, not a separate category.
- Using ROI for projects with many cash flows โ when money goes in and comes out over time, IRR is the correct metric.
Calculating ROI Fast
The ROI Calculator computes ROI, total profit and annualized return from your purchase price, sale price, holding period and income. For stocks specifically, the Stock Profit Calculator handles per-share math including commissions. Both are free and run entirely in your browser โ nothing is sent to a server.