How to Calculate ROI? Understand the Core Formula and Practical Applications of Investment Return Rate in One Article

Many investors have heard of the term “ROI,” but few truly understand how to calculate it. Even more painfully, many people’s ROI figures are completely inflated. Today, we’ll start from the most basic definition of investment return rate and teach you step-by-step how to use ROI to measure your investment results.

What is Investment Return Rate (ROI)?

Return on Investment (ROI) is a financial metric used to measure how much your money has earned. On the surface, it’s simple—dividing profit by investment—but in practice, there are many pitfalls.

Core Definition: ROI = Net Profit ÷ Total Investment × 100%

This percentage intuitively reflects your investment efficiency. For example, investing 1 million dollars and earning 300,000 dollars yields an ROI of 30%. But the key is—how exactly are “Net Profit” and “Total Investment” calculated?

How to Calculate ROI? Let’s look at formulas through examples

ROI in stock investment

Suppose you buy 1,000 shares at $10 each, sell them a year later at $12.5, and received $500 in dividends, but paid $125 in trading commissions. How to calculate this?

Total Income: Sale proceeds (12.5×1000=12,500) + Dividends (500) = $13,000

Total Cost: Initial purchase (10×1000=10,000) + Trading commissions (125) = $10,125

Net Profit: 13,000 - 10,125 = $2,875

ROI: 2,875 ÷ 10,000 = 28.75%

The key point in this example: when calculating ROI, all income and all costs must be included. Omitting any item will lead to an inflated result.

ROI in advertising or e-commerce scenarios

Product cost $100, selling price $300, sold 10 units, advertising cost $500.

Total Revenue: 300 × 10 = $3,000

Total Cost: 100 × 10 + 500 = $1,500

ROI: (3,000 - 1,500) ÷ 1,500 = 100%

But beware of a common misconception—many e-commerce practitioners refer to “ROI,” but they actually mean ROAS (Return on Ad Spend), calculated as: ROAS = Sales Revenue ÷ Advertising Cost = 3,000 ÷ 500 = 600%.

What’s the fundamental difference between ROI and ROAS?

These two metrics are often confused, but they measure completely different things:

ROI measures profit, including all costs (product costs, advertising costs, etc.)

ROAS measures revenue, only considering advertising spend, ignoring product costs

Using the above example:

• ROI = 100% (reflects actual profit)
• ROAS = 600% (only shows advertising effectiveness)

The numbers look very different, but they answer different questions. Which to use depends on what you want to evaluate.

Annualized ROI: Why consider time?

This is a critical point many overlook. Suppose two investment plans:

Plan A: 2-year total return of 100%

Plan B: 4-year total return of 200%

At first glance, B seems more profitable. But what about annualized return?

Plan A: [((1 + 100%)^()1/2() - 1] × 100% = 41.4%

Plan B: [()1 + 200%)^((1/4)) - 1] × 100% = 31.6%

Clearly, A’s annual growth rate is faster. This illustrates why you can’t simply compare total ROI—annualized ROI removes the effect of time differences, revealing the true investment efficiency.

The three confusing metrics for investors: ROI, ROA, ROE

These three involve “returns,” but their meanings are quite different:

Example of a listed company: total assets $10 million (of which $5 million debt, $5 million equity), invested $1 million in a project, earning $2 million.

• ROI of the project = (200 - 100) ÷ 100 = 100%
• Company’s annual profit = $5 million, ROA = 5,000,000 ÷ 10,000,000 = 50%
• ROE = 5,000,000 ÷ 5,000,000 = 100%

ROI appears highest, but that’s because it only considers the specific project. ROE best reflects the true return to shareholders.

Want to improve your ROI? Here’s the most direct way

From the formula, increasing ROI involves two paths: increasing revenue or reducing costs.

In stock investing: choosing high-dividend stocks + low-fee brokers = lower costs

But in reality, optimizing trading costs can only boost ROI by a few percentage points. The most effective way is to choose the right assets.

Based on historical data, the approximate ranking of ROI across asset classes is:

Cryptocurrency & Forex > Stocks > Index Funds & Mutual Funds > Bonds

High ROI often comes with high risk. If a certain cryptocurrency’s volatility is twice that of a stock, you can allocate your position in a 1:2 ratio inversely to balance risk and return.

Also, consider valuation. For the same index fund, if Fund A’s PE percentile (current valuation relative to history) is 70%, and Fund B’s is 50%, then Fund B has lower risk and potentially higher future ROI—that’s the logic behind “lower valuation often correlates with higher future ROI.”

Quick comparison of high-ROI investment methods

( CFD Trading

Leverage small capital to control large positions—stock CFDs require only 20% margin. With a $10,000 account, you only need $2,000 to trade, and earning $500 yields a 25% ROI. This high leverage attracts short-term traders but also amplifies risks.

) Forex Margin Trading

Forex is the largest global trading market, with 24-hour liquidity and sometimes over 30% returns. But international market volatility requires traders to have strong risk management and geopolitical awareness.

( Gold Investment

A strong store of value and appreciation asset, traditionally used as a hedge. Historically, its volatility is moderate, suitable for investors seeking stability and inflation beating.

) Stock Investment

The US stock market has an average annual return of over 12% over nearly 200 years, making it a relatively stable choice in mature markets. Low-valuation, high-dividend stocks are good options.

4 pitfalls to watch when using ROI, especially for beginners

1. Ignoring the time factor

A 25% ROI sounds good, but if it takes 5 years, it’s less impressive than 15% ROI earned in 1 year. Use annualized ROI for fair comparison.

2. Only looking at returns, ignoring risks

High ROI often means high volatility. Some investments have ROI up to 50%, but also face 50% loss risks. Panic selling during downturns is common among such investors.

3. Incomplete cost calculations leading to inflated ROI

When evaluating real estate ROI, many only consider rental income, forgetting mortgage interest, taxes, insurance, maintenance. This can overstate ROI by more than 30%.

4. Focusing only on financial returns, ignoring other benefits

For example, an ESG investment project may have modest financial ROI but significant social and environmental value. Some have proposed “Social Return on Investment” (SROI) to measure such benefits, making assessments more comprehensive.

Final advice

While ROI is a core metric for evaluating investments, it shouldn’t be the only one. A comprehensive investment decision should consider annualized ROI, risk levels, valuation position, and time horizon.

Blindly chasing high ROI often leads to leverage, chasing trends, and taking risks beyond one’s capacity, resulting in heavy losses. Calculating ROI is just the first step; rational interpretation of ROI is the key.