How to Calculate a Return on an Investment

Series Summary

Personal finance is the application of financial principles to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, while taking various financial risks and future life events into account. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies and income tax management. In this free video series on investing, a portfolio manager discusses stocks, bonds and other investments. Find out how to calculate a price to earnings ratio, a return on an investment and a bond's yield to maturity. Learn about choosing a stockbroker, and discover the par values of bonds. Investing money is a great way to build a savings.

Video Transcript

"OK so how do we calculate a return on investment also terms ROI a lot. You'll see the three letters ROI in big capital letters. Return on investment really means a lot of times for example in stock you purchase a stock for 20 dollars but you also paid say a 10 dollar fee to buy that stock so maybe you bought I don't know, a 100 dollars worth and so you spent 10 dollars on your hundred dollars so now we're at 110 dollars total that you've spent, that's your investment. Now if that stock were to go up in value, that's great because you're actually behind in the very beginning because you purchased a stock and added on the cost of trading. When you sell the stock or sell the shares, you're going to be incurring again another for example 10 dollar fee. So you need to make more than 120 dollars so for example if you did the trade, you bought the stock, paid the fees, sold the stock, paid the fees and you bought them for 100 dollars worth of stock, you sold it for 125 dollars. Well your fees in and out were 20 dollars, the stock cost 100 dollars so you paid 120. You sold it for 125 so they actual return on investment would have been 5 dollars. So really to calculate ROI what you need to do is take in all your expenses and the price of the purchase and add all those together and then you subtract that from your final sum when you sell when you finish the investment."