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What Is Return On Investment (ROI)

Views 20902022.03.02
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Key takeaways

  • Return on investment (ROI) is a commonly used metric for investors to evaluate the profitability of an investment.

  • ROI is expressed as a ratio, that is, the result of investment gain relative to its cost.

  • ROI doesn't tell the full story of an investment if we allow for inflation, how long you hold it and related cost, etc.

Understanding return on investment

Karl Marx once quoted in his works that if capital can get 100% profit, it will "trample on all human laws". This judgment does highlight the power of profits, or more accurately, return on investment (ROI).

ROI is a financial metric for evaluating investment performance. It refers to the result of dividing profits from an investment by its cost. Therefore, it is normally expressed as a percentage or a ratio.

The simplified formula is as follows:

ROI = ( Net Profit / Cost of Investment) x 100%

ROI can be used to measure the profitability of an investment and compare different opportunities. Investments can't guarantee profits, but a good ROI generally means positive returns, at least in the long term to beat the market.

Limitations

Investment is subject to a variety of factors. Obviously, the simple formula of profits relative to initial costs can't tell the full story of investments.

If the investment period, inflation, stability of returns... are considered in the calculation, the result will differ accordingly. The level of risk and related cost from the same and different types of investments are also key factors in their ROI comparisons.

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Example

Let's say you buy 50 shares of a stock for $10 per share, with a total cost of $500. One year later, you sell them for $15 per share. In this case, you will receive a total of $750. Based on the simplest formula, the ROI is 50% ($250 / $500).

Assuming that the commission fee is $5 per transaction, your ROI after commission fees will be 48% (($250 - $10)/ $500).

The content in this article is intended for general circulation and informational purposes only. It does not take into account the investment objectives, financial situation or needs of any particular person and should not be relied on as advice or recommendation. Information provided in this article are not specifically intended for or specially targeted at the public in any specific jurisdiction. Neither Moomoo Inc. nor its affiliates are licensed Financial Advisers and do not provide financial advice. You are advised to consult your financial adviser before making any commitment to invest in any capital markets product. The information published is not and does not constitute or form part of any offer, invitation or solicitation to subscribe or to enter into any transaction in capital markets products. Moomoo is a professional trading app offered by Moomoo Inc. In the U.S., investment products and services on Moomoo are offered by Futu Inc., Member FINRA/SIPC. In Singapore investment products and services are offered through Futu Singapore Pte. Ltd., regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the MAS. Moomoo Inc., Futu Inc. and Futu Singapore Pte. Ltd are affiliated companies. Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.

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