Return on investment (ROI)

Total proceeds less total cost, divided by total cost - the simplest measure of what an investment produced.

Example

69,000 of proceeds on a 50,000 cost is a gain of 19,000, so an ROI of 38.0%.

Important

It contains no time at all. The same 38.0% is 4.71% a year over seven years and 23.95% a year over eighteen months, so an ROI quoted without its holding period is close to meaningless.

Related terms

• Annualised return — A return restated as the equivalent constant rate per year: total proceeds over total cost, raised to the power of one over the number of years, minus one.
• Cost basis — What an investment actually cost you: the purchase price plus every fee, tax and expense required to acquire it and make it usable.
• Internal rate of return (IRR) — The single annual rate at which every cash flow, positive and negative, discounts back to exactly zero - the r solving sum of CF_t/(1+r)^t = 0.

Lessons that explain it

• For most people, their future earnings are the largest asset they own — Human capital - the value of your ability to earn - is usually worth far more than a young person's savings. Education, skills and health are ways of investing in it, with real costs and uncertain returns. (9 min)
• The return is the earnings difference, not the certificate — A self-investment pays off through higher earnings, better opportunities or more working years. Measure it as a difference over time, after tax, against what it cost. (11 min)
• ROI, and the one thing it leaves out — Return on investment is the simplest measure there is, and it is silent about time. Two investments with the same ROI can be wildly different propositions. (9 min)

All 578 terms in the Investing glossary