What is return on investment (ROI)?
Return on investment (ROI) is what an investment made, as a percent of what it cost. FINRA counts the whole cost, including commissions and other fees, and the whole return: the rise in value plus any dividends or other income.
Source FINRA · Calculating your investment returns ↗
How to calculate ROI
Here it is with your numbers:
- What you got back: $13,000.00 + $500.00 = $13,500.00.
- Gain: $13,500.00 − $10,000.00 = $3,500.00.
- ROI: $3,500.00 ÷ $10,000.00 = 0.35, or 35.00%.
- Annualized: (1 + 0.35)^(1 ÷ 3) − 1 = 0.1052, or 10.52% a year.
It means growing 10.52% a year for 3 years turns $10,000.00 into $13,500.00.
Source Microsoft Support · RRI function ↗
Annualized ROI: the return per year
A total ROI doesn't say how long it took. The annualized return is the yearly rate that, compounded, gives the same total: (1 + ROI)^(1 ÷ years) − 1. Dividing the total by the years instead overstates it, because it ignores compounding. With dates, we count the days and divide by 365, as Excel does.
The same total return, spread over more years, is less per year:
| Held for | A year (annualized) |
|---|---|
| 1 year | 35.00% |
| 2 years | 16.19% |
| 3 years | 10.52% |
| 5 years | 6.19% |
| 10 years | 3.05% |
| 20 years | 1.51% |
| 30 years | 1.01% |
Source Microsoft Support · XIRR function (365-day year) ↗
FAQs
How do you calculate the ROI?
Take what you got back (the value or sale price plus any income, such as dividends), subtract the total cost, including fees, and divide by the total cost: ROI = (value + income − cost) ÷ cost. Multiply by 100 for a percent.
What does 20% annualized return mean?
It means the investment grew as if it earned 20% every year, compounded. Over 3 years that turns $1,000 into $1,728, a total return of 72.80%, not 60%: each year's 20% is on a bigger amount.
Is 100% ROI breaking even?
No: 0% is breaking even. A 100% ROI means you got back twice what you put in, so you doubled your money. A negative ROI is a loss, and −100% means you lost all of it.
Sources
- FINRA: Calculating your investment returns
- Microsoft Support: RRI function
- Microsoft Support: XIRR function (365-day year)