ROI Investment Return Rate Calculation Formula Quick Guide: From Beginner to Expert

The essence of investing and making money is ROI

When it comes to making money, many people think of stocks, real estate, or cryptocurrencies. But regardless of the investment type, the core question is actually—How much return can your money earn? This is the problem that return on investment (ROI) aims to solve.

ROI, simply put, is the percentage of your profit relative to the invested capital. From another perspective, ROI is a key indicator used to measure investment efficiency. It’s not only applicable to personal financial decisions but also used by companies to evaluate project feasibility and assess capital allocation efficiency.

The calculation formula for ROI is actually very simple

ROI = (Total Revenue - Total Cost) / Total Cost × 100%

Does it look a bit complicated? The core logic boils down to three words: how much did you earn.

For example, if you spend 1 million dollars to buy a stock, and later sell it for 1.3 million dollars, then ROI equals ((130 - 100) / 100 = 30%. That 30% represents your investment return rate.

But real-world situations are often not so straightforward. Because the definitions of “revenue” and “cost” vary depending on the type of investment.

How to calculate ROI for different investment types?

Stock Investment ROI Calculation

Suppose you buy 1,000 shares at $10 each, and after a year, sell them at $12.5 each. During this period, you also received $500 in dividends, but paid $125 in transaction fees.

How to calculate this?

• Total Revenue = Sale income + Dividends = 12.5×1000 + 500 = $13,000
• Total Cost = Initial purchase + Transaction fees = 10×1000 + 125 = $10,125
• Net Profit = 13,000 - 10,125 = $2,875
• ROI = 2,875 / 10,125 ≈ 28.75%

Note the details here: dividends and commissions must be included; ignoring these “small amounts” can directly affect the final return rate.

E-commerce and Advertising ROI

In e-commerce, the ROI formula is slightly different: ROI = (Sales Revenue - Cost of Goods) / Cost of Goods × 100%

For example: cost of goods is 100 units, selling price is 300 units, 10 items sold through advertising, with an ad spend of 500 units.

Then ROI = (300×10 - 100×10 - 500) / (100×10 + 500) = 1500 / 1500 = 100%

It’s worth noting that many operational staff refer to “ROI” colloquially, but they actually mean ROAS (Return on Ad Spend), which is calculated as: ROAS = Revenue generated from ads / Advertising cost

Using the same example, ROAS = (300×10) / 500 = 600%. The difference is that ROI looks at profit, while ROAS looks at revenue.

Annualized Return Rate: Making returns more comparable

If one project earns 100% in two years, and another earns 200% in four years, which one should you choose? Comparing total returns directly can be misleading.

This is where annualized return rate comes in: Annualized Return Rate = [(Total Return + 1)^(1/Number of Years) - 1] × 100%

• Project A: [(1 + 1)^(1/2) - 1] × 100% ≈ 41.4%
• Project B: [(2 + 1)^(1/4) - 1] × 100% ≈ 31.6%

At first glance, Project B has a higher total return, but on an annualized basis, A is more efficient. That’s why the annualized return rate is important—it removes the influence of time.

Confusing ROI, ROA, and ROE?

When evaluating investments, companies often look at three metrics, which have subtle but important differences:

Simple example: a company with total assets of $1 million (of which $500,000 is debt and $500,000 is equity), invests $100,000 in a project, which later returns $200,000.

• ROI of the project = (200 - 100) / 100 = 100%
• Annual profit of the company = $1.5 million, ROA = 1,500,000 / 1,000,000 = 150%
• ROE = 1,500,000 / 500,000 = 300%

How to improve your own investment return rate?

From the ROI formula, to increase returns, you can either boost income or reduce costs.

In stock investing, you can choose stocks with high dividends, select brokers with low commissions, and minimize unnecessary trades. But these micro-optimizations often have limited effects.

The most direct way is actually one: choose high-ROI investment targets.

Generally, the ranking of ROI across different assets is roughly:

Cryptocurrencies and Forex > Stocks > Index Funds > Bonds

High returns usually come with high risks. For example, a certain cryptocurrency may be very volatile, and you can balance risk by adjusting your position size. Also, look at valuation; assets with low PE percentiles tend to be less risky and potentially offer higher returns.

Several efficient ways to achieve investment returns

CFD Trading

CFD is an over-the-counter trading instrument, attracting many short-term traders due to its low margin and high leverage. For example, with stocks, CFDs require only 20% margin. A $10,000 principal needs only $2,000 to operate. If you earn $500, the ROI is 25%.

Forex Margin Trading

The forex market is the largest financial market globally, trading 24 hours a day, with sometimes over 30% returns. But the risks are also higher, requiring traders to have solid fundamental analysis skills and risk management awareness.

Gold Investment

Gold has a safe-haven attribute. In 2019, international gold prices rose by 18.4%, hitting an 8-year high. During economic fluctuations, gold often performs relatively well.

Stock Investment

The US stock market has an average annual return of over 12% over nearly 200 years. Compared to other assets, stocks are more mature, transparent, and easier to understand.

Although ROI is good, there are four major limitations to be aware of

First, it doesn’t consider the time dimension

Project X’s ROI is 25%, and project Y’s ROI is 15%. But if X took 5 years to earn, and Y only 1 year, then Y is actually more efficient. So, when comparing investments, always look at the annualized return.

Second, high ROI correlates with high risk

The higher the ROI, the greater the potential risk. Investors focusing only on the numbers may ignore volatility, risking losses in the first year and panic selling.

Third, ROI can be easily overestimated

If some costs are omitted in calculations, the return rate will be exaggerated. For example, real estate investments should consider mortgage interest, taxes, insurance, and maintenance, which can eat into returns.

Fourth, only looking at financial returns ignores other values

ROI is a purely financial metric and cannot reflect social benefits, environmental impact, etc. Therefore, some have created “Social Return on Investment” (SROI) to evaluate projects more comprehensively.

Final advice

Reasonable return expectations can help you avoid taking on excessive risks. What ROI is considered reasonable? It depends on your risk tolerance, investment amount, and cycle.

The core principle is: don’t just look at the ROI number; consider volatility, valuation, risk capacity, and other factors to make more rational investment decisions.