How to Calculate a Return on Investment
Calculating a return on investment, commonly called an ROI, is a simple calculation that can be used to make sound judgments. If you are having problems deciding on a potential investment, you could calculate your projected return on investment to help guide you to a decision. You can also use the ROI calculation to determine your gains or losses on existing investments in your possession. Portfolio stocks are a common example of an asset used to calculate a return on investment. In addition to stocks, an investor could calculate the return on investment for a variety of assets including real estate, online real estate, a franchise, or small business.
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Instructions
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1
Identify the cost of your existing or projected investment. For example, if you own 100 shares of a stock at an average of $25 per share - your cost on investment is $2,500. You should also factor in any commission costs or other fees like closing costs on real estate in this number.
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2
Figure your gain or projected gain from selling an asset to be used in calculating your return on investment. To calculate the gain on an investment, you simply take the total sale less the original cost less any additional fees. For example, if you are thinking of selling your 100 shares of stock at $32 per share -- your gain from investment would be $700 or ($32 x 100) - $2,500. For simplicity, this calculation was made without factoring in any commissions or fees.
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3
Use the gain or projected gain in Step 2 as the numerator and the cost of investment from Step 1 as the denominator to calculate the return on investment. In keeping with the prior example, we would use $700 / $2,500 which equals .28 or 28 percent. A 28 percent potential gain on a stock transaction may be enough for you to decide to sell out of the position.
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Analyze your return on investment calculation to help make educated decisions for assets or potential business transactions. A 28 percent gain from a stock from our example above is an excellent return over the course of a few months. But what if that calculation was for a stock you purchased 10 years ago? That would mean the average return on investment over the course of 10 years was less than 3 percent per year, which is not as stellar as the 28 percent gain.
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Compare the return on investment that you calculate across different types of assets. For example, you could calculate a potential gain on a stock and compare it with an investment on real estate. Breaking the numbers down like this lets you analyze different business options so that you can get the best return possible for your investment style.
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Tips & Warnings
Calculate the ROI for all of your investments as a way to compare the return on different types of assets. Play around with the numbers and run ROI calculations to get a feel for your desired return.
Don't make an investment decision solely on a projected return on investment. After all, you are only using a projected gain from investment, which may not be accurate.
