How to Calculate Percentage Return on Investment
The concept of return on investment (ROI) --- that is, how much money am I going to make on my investment? --- is involved in any investment decision. ROI is the key piece of information you need to know to decide if the investment is worth the risk, as all investments have some risk. ROI is usually discussed in terms of an annual percentage.
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Calculating Return on Investment
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To calculate return on an investment, you divide the annual profit by the total investment to come up with a percentage. If you invest $1,000 in a one-year certificate of deposit at 2 percent interest, you will have $1,020 for an ROI of 2 percent. But calculating ROI on other types of investments like stocks and bonds or real estate can become very complex and often requires the services of an accountant.
Higher Risk Equals Higher Return
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The most important thing to remember about ROI is that higher risk generally equals higher returns. You can be guaranteed 2 percent on your investment in a bank CD with almost no risk. Or you could make a 14 percent ROI if you invest in a Canadian oil trust, but there is much more risk if the price of oil drops greatly or production is reduced for some reason.
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Example of ROI on a Dividend-Paying Stock
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ROI is reasonably easy to calculate for a dividend-paying stock. Say you bought bought 100 shares of a stock at $10 each (for a $1,000 total investment) and the stock pays a $1 per share annual dividend. After one year, you have a total of $1,100, for a 10 percent ROI. Let's say the stock price also appreciated from $10 to $11. Then your total investment is worth $1,200, for a 20 percent ROI. However, keep in mind it works both ways --- if the stock price goes down more than one dollar, you could even have a negative ROI.
Example of Real Estate ROI
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Calculating ROI on a real estate investment is much more complex, as it involves many factors. Let's say you have excellent credit and you bought a house to rent as an investment with no down payment. You have a $1,500 monthly mortgage payment on the house ($18,000 annually), your total annual property taxes are $4,000 and your total annual maintenance expenses are $2,000, for a total of $24,000 a year. So if you charge $2,500 month in rent, you will bring in $30,000 a year; $30,000 minus the $24,000 total expenses equals $6,000 annual profit, or 25 percent ROI.
Using Spreadsheets and Databases to Calculate ROI
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Many investors find computerized spreadsheets and databases (Excel, Quicken, Access) very useful when calculating the ROI for complex investments, as the various factors can all be accounted for and tallied automatically.
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