Saving & investing
Return on investment (ROI): Definition, Formula and Example
ROI expresses an investment’s gain or loss relative to its cost over a stated holding period.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: ROI; Total investment return.
How it works
Define proceeds, income and costs consistently. A total ROI does not adjust for how long the investment was held. Annualizing a single initial outlay and final receipt is different from measuring a portfolio with intervening deposits or withdrawals.
ROI = (total amount received − investment cost) / investment cost
A positive cost is required. Include relevant income and fees consistently; multiply the ratio by 100 to show a percentage.
$2,500 returned from a $2,000 investment
Assume all receipts arrive at the end of a two-year holding period.
- Gain: $2,500 − $2,000 = $500.
- Total ROI: $500 / $2,000 = 25%.
- Annualized endpoint return: (2,500/2,000)^(1/2) − 1 ≈ 11.8034%.
Total ROI is 25% over two years, not 25% per year.
One initial outlay and one final total receipt; no other cash flows, fees or taxes.
Try these example inputsROI does not measure risk or cash-flow timing
Equal total ROI can come from different holding periods and different risks. Money added during the period must not be mistaken for investment profit. Use a cash-flow-aware method when dates and contributions matter.
Explore with a calculator
- ROI Calculator
Calculate total and annualized endpoint return.
- Investment Calculator
Project balances with stated regular contributions.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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