Return on investment (ROI) measures how much you gained or lost relative to what you put in: ROI = (final value − cost) ÷ cost × 100. Buy a stock for $5,010 including commission, collect $150 in dividends and sell for $6,790 after commission, and your ROI is $1,930 ÷ $5,010 = 38.5%. Because that took three years, the more useful figure is the annualized ROI of about 11.5% a year, which lets you compare it with investments held for different lengths of time.
The ROI formula
- Total cost: the purchase price plus fees, commissions, closing costs and any additional money you put in.
- Final value: the sale proceeds after selling costs, or the current market value if you still hold it.
- Income: dividends, interest, rent or other cash you received along the way.
A positive result is a gain; a negative one is a loss. The ROI calculator handles the arithmetic and the annualized version.
Worked example: a stock investment
| Item | Amount |
|---|---|
| Buy 100 shares at $50.00 | $5,000.00 |
| Commission on purchase | $10.00 |
| Total cost | $5,010.00 |
| Sell 100 shares at $68.00 | $6,800.00 |
| Commission on sale | −$10.00 |
| Dividends received over 3 years | $150.00 |
| Total returned | $6,940.00 |
ROI = ($6,940 − $5,010) ÷ $5,010 = $1,930 ÷ $5,010 = 38.52%.
Leaving out the fees and dividends would give ($6,800 − $5,000) ÷ $5,000 = 36%. The difference is small here, but on frequent trades or high-fee products, ignoring costs can turn a loss into an apparent gain. For trades with several buys and sells, the stock profit calculator tracks each lot.
Annualizing ROI
A 38.5% return sounds better than a 25% return, until you learn the first took three years and the second took one. Annualizing converts any holding period into an equivalent yearly rate:
For the stock: (1.38523)1/3 − 1 = 11.47% a year.
Do not divide 38.5% by 3 to get 12.8%. That ignores compounding and overstates the yearly return. For periods shorter than a year the formula still works, but annualizing a lucky one-month gain can produce a misleadingly huge number.
Comparing two investments
| Investment | Total ROI | Years held | Annualized ROI |
|---|---|---|---|
| A | 40% | 4 | 8.78% |
| B | 25% | 2 | 11.80% |
B had the lower total ROI but the better annual performance. Annualized ROI is the same idea as the compound annual growth rate; the guide on CAGR vs. average annual return explains why it differs from a simple average of yearly returns, and the CAGR calculator computes it from start and end values.
ROI in other settings
Rental property
Real estate investors use several versions:
- Cash-on-cash return: annual pre-tax cash flow ÷ cash invested. $4,200 of yearly cash flow on $60,000 of down payment and closing costs is 7.0%.
- Total ROI: adds principal paydown and appreciation to the cash flow, then divides by cash invested. It is higher, but appreciation is only realized when you sell.
- Cap rate: net operating income ÷ property price, ignoring financing.
The rental property calculator shows all three. Be careful to include vacancy, repairs, property management and capital expenses; leaving them out is the most common way rental ROI is overstated.
Marketing and business projects
For a campaign, ROI should use profit, not revenue:
A $2,000 ad campaign that brings in $7,500 of sales at a 40% gross margin generates $3,000 of gross profit. ROI = ($3,000 − $2,000) ÷ $2,000 = 50%. The revenue-based ratio, $7,500 ÷ $2,000 = 3.75, is called return on ad spend (ROAS), and it looks far better than the true return. For a business decision, also see how to calculate a break-even point.
Home improvements
Homeowners often ask about the ROI of a remodel. The financial return is the increase in resale value minus the project cost, divided by the cost. A $30,000 kitchen remodel that raises the home’s market value by $21,000 has an ROI of ($21,000 − $30,000) ÷ $30,000 = −30%. Many projects recover only part of their cost at sale, so the case for them usually rests on the years of use you get before selling, not on the resale math alone. Energy upgrades are different: their return comes mainly from lower utility bills, so divide the yearly savings by the cost to get a simple annual return.
Where ROI misleads
- It ignores time unless you annualize it.
- It ignores risk. A 12% return on a speculative stock and a 12% return on a bond are not equally good outcomes.
- It ignores the timing of cash flows. If you add money at different times, as with monthly 401(k) contributions, simple ROI on total contributions overstates or understates performance. A money-weighted return (internal rate of return) handles this; see the investment calculator for projections with regular contributions.
- It is easy to game. Leaving out fees, taxes, your own time or the cost of borrowed money all inflate the result.
- Inflation erodes it. A 6% nominal ROI during a year of 3% inflation is roughly a 3% real gain.
- Taxes matter. Gains held over one year are generally taxed as long-term capital gains under IRS rules, at lower rates than short-term gains; after-tax ROI is what you actually keep.
Losses and the recovery math
ROI is not symmetric. A −15% ROI requires a gain of 1 ÷ 0.85 − 1 = 17.6% just to get back to even, and a −50% loss requires a 100% gain. This asymmetry is why volatile investments can earn less over time than their average yearly return suggests.
Quick checklist
- List every dollar you put in, including fees and later contributions.
- List every dollar you got back or still hold, net of selling costs.
- Compute total ROI.
- Annualize it with the holding period in years.
- Compare against an alternative of similar risk, after taxes and inflation where relevant.
For how gains build on gains over many years, see how compound interest works.
This guide is for general education and is not investment or tax advice. Past returns do not guarantee future results; consider your own situation or consult a qualified professional before investing.
Frequently asked questions
What is the basic ROI formula?
ROI = (final value − initial cost) ÷ initial cost × 100. If you invest $5,000 and end up with $6,500, ROI is $1,500 ÷ $5,000 = 30%. Include fees in the cost and any income, such as dividends, in the final value.
What is a good ROI?
It depends on the risk and the time period. For context, broad US stock indexes have historically averaged roughly 10% a year before inflation over long periods, while insured savings pay much less with almost no risk. Always compare annualized ROI on investments of similar risk.
How do I annualize ROI?
Use (1 + ROI)^(1/years) − 1. A 38.5% total return over 3 years annualizes to (1.385)^(1/3) − 1 = 11.5% a year. Do not simply divide by the number of years, which overstates returns longer than one year.
Can ROI be negative?
Yes. A negative ROI means you lost money. Buying for $10,000 and selling for $8,500 is an ROI of −15%. Note that recovering from a loss takes a larger percentage gain: after a 15% loss you need about a 17.6% gain to break even.
Is ROI the same as profit margin?
No. ROI measures gain relative to the money invested, while profit margin measures profit relative to revenue. A campaign can have a high revenue-to-spend ratio and still a low or negative ROI once the cost of goods sold is subtracted.