Financial education
ROI Explained: Return on Investment
ROI compares profit or loss with the initial investment and expresses the relationship as a percentage.
How the math works
ROI is profit or loss divided by the original cost, expressed as a percentage. It answers 'how much did I gain relative to what I put in', but on its own says nothing about how long that gain took to happen.
Worked example
Investing $5,000 and ending with $6,200 gives a profit of $1,200 and an ROI of 24%. That 24% ROI means something very different if it happened over 6 months versus 6 years — ROI alone doesn't distinguish the two.
What to watch for
- ROI ignores time — pair it with the holding period, or convert to an annualized rate, before comparing options
- Costs used in the ROI calculation should include fees and transaction costs, not just the sticker price
- A negative ROI communicates a loss relative to the original cost, not necessarily a loss of the entire investment
Practical takeaway
Never compare two ROI percentages without also comparing the time each one took to achieve — the same ROI over different periods isn't the same result.