In finance, rate of return (ROR) or return on investment (ROI), or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment.
ROI is also known as rate of profit, rate of return or return. Return can also refer to the monetary amount of gain or loss. ROI is the return on a past or current investment, or the estimated return on a future investment. ROI is usually given as a percent rather than decimal value.
ROI does not indicate how long an investment is held. However, ROI is most often stated as an annual or annualized rate of return, and it is most often stated for a calendar or fiscal year. In this article, “ROI” indicates an annual or yearly rate of return, unless otherwise noted.
ROI is used to compare returns on investments where the money gained or lost -- or the money invested – are not easily compared using monetary values. For instance, a $1,000 investment that earns $50 in interest obviously generates more cash than a $100 investment that earns $20 in interest, but the $100 investment earns a higher return on investment.
$50/$1,000 = 5% ROI
$20/$100 = 20% ROI
Since rates of return are percentages, negative rates cannot be averaged with positive rates for purposes of calculating monetary returns. However, it is common practice in finance to estimate monetary returns by averaging periodic rates of return; these estimations are most useful when the averaged periodic returns are all positive, all negative, or have low variances.
ROI is also known as rate of profit, rate of return or return. Return can also refer to the monetary amount of gain or loss. ROI is the return on a past or current investment, or the estimated return on a future investment. ROI is usually given as a percent rather than decimal value.
ROI does not indicate how long an investment is held. However, ROI is most often stated as an annual or annualized rate of return, and it is most often stated for a calendar or fiscal year. In this article, “ROI” indicates an annual or yearly rate of return, unless otherwise noted.
ROI is used to compare returns on investments where the money gained or lost -- or the money invested – are not easily compared using monetary values. For instance, a $1,000 investment that earns $50 in interest obviously generates more cash than a $100 investment that earns $20 in interest, but the $100 investment earns a higher return on investment.
$50/$1,000 = 5% ROI
$20/$100 = 20% ROI
Since rates of return are percentages, negative rates cannot be averaged with positive rates for purposes of calculating monetary returns. However, it is common practice in finance to estimate monetary returns by averaging periodic rates of return; these estimations are most useful when the averaged periodic returns are all positive, all negative, or have low variances.
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