Understanding Return on Investment (ROI)

Return on Investment (ROI) is a fundamental financial metric used to evaluate the efficiency and profitability of an investment. It measures the amount of return on an investment relative to the investment's cost, helping investors make informed decisions about where to allocate their capital.

ROI Formula and Calculation

The basic ROI formula is: ROI = (Final Value - Initial Investment) / Initial Investment × 100

For investments held over multiple years, annualized ROI provides a more accurate comparison by accounting for the time factor in your returns.

What Makes a Good ROI?

• Stock Market: Historical average of 7-10% annually
• Real Estate: Typically 8-12% annually
• Business Investments: Often target 15-25% or higher
• Bonds: Generally 2-6% annually

Factors to Consider

While ROI is a valuable metric, consider other factors like risk level, liquidity, time horizon, and opportunity cost when making investment decisions. Higher ROI often comes with higher risk.