Return on investment measures what you gained or lost compared to what you put in

Return on investment (ROI) is a single number that shows whether money you invested made more money, lost money, or stayed flat. It answers the question: for every dollar I put in, how many cents did I gain or lose? The formula is straightforward: subtract what you started with from what you ended with, divide by what you started with, then multiply by 100 to get a percentage.

The math looks like this: (Ending Value − Starting Value) ÷ Starting Value × 100 = ROI%. If you invested $1,000 and it grew to $1,250, your ROI is ($1,250 − $1,000) ÷ $1,000 × 100 = 25%. If it shrank to $800, your ROI is ($800 − $1,000) ÷ $1,000 × 100 = −20%.

ROI does not account for how long the money was invested, how often you added or withdrew funds, or fees you paid along the way. Those details matter when you are comparing one investment to another, which is why ROI is useful as a starting point but not the whole story.

Key Takeaways

  • ROI is calculated by dividing your profit or loss by the amount you invested, then multiplying by 100 to express it as a percentage.
  • A positive ROI means you made money; a negative ROI means you lost money; zero ROI means your investment stayed the same.
  • ROI does not tell you how long your money was invested or account for fees, taxes, or additional deposits you made over time.
  • When comparing two investments, you need to know the time period each covered, because a 10% return over one year is different from 10% over five years.

The basic ROI formula and a worked example

Start with three numbers: how much you invested at the beginning, how much it is worth now, and the time period that covers. Subtract the starting amount from the ending amount to get your gain or loss. Then divide that number by the starting amount.

Say you bought a stock for $500 and sold it for $650 one year later. Your gain is $650 − $500 = $150. Your ROI is $150 ÷ $500 = 0.30, or 30%. If instead you sold it for $400, your loss is $400 − $500 = −$100. Your ROI is −$100 ÷ $500 = −0.20, or −20%.

The percentage tells you the rate of return. A 30% ROI means you earned 30 cents for every dollar you invested. A −20% ROI means you lost 20 cents for every dollar you invested. This makes it easier to compare investments of different sizes: a $500 investment that returned 30% and a $10,000 investment that returned 30% both earned the same rate, even though the dollar amounts are different.

Why time period matters when you compare investments

ROI as a percentage does not tell you how fast you made that return. A 10% ROI over one year is much better than a 10% ROI over ten years, because your money was tied up longer and you could have invested it elsewhere. When you are deciding between two investments, always ask: over how many months or years did each one earn that return?

If Investment A returned 15% in one year and Investment B returned 15% in five years, Investment A is the stronger performer. To compare them fairly, you would need to calculate an annualized return — the average return per year — which requires dividing the total ROI by the number of years. Investment A's annualized return is 15% ÷ 1 = 15% per year. Investment B's annualized return is 15% ÷ 5 = 3% per year.

What ROI does not include

The basic ROI formula ignores several real costs and changes that affect your actual money. It does not subtract fees you paid to buy or sell the investment, trading commissions, or account management charges. It does not account for taxes you owe on the gains. It does not adjust for inflation, which means a 5% ROI in a year when prices rose 4% is really only a 1% gain in purchasing power.

ROI also assumes you invested a lump sum at the start and did nothing else. If you added money monthly, withdrew some partway through, or reinvested dividends, the basic formula does not capture that. For those situations, you would use a more complex measure called internal rate of return (IRR) or time-weighted return, which account for the timing and size of each deposit or withdrawal.

Negative ROI and what it means

A negative ROI means you lost money. If you invested $2,000 and it is now worth $1,600, your ROI is ($1,600 − $2,000) ÷ $2,000 × 100 = −20%. You lost 20% of your investment. The negative sign is important: it tells you the direction of the change, not that the math is wrong.

Negative ROI happens when markets fall, when you sell at the wrong time, or when the company or fund you invested in performs poorly. It is not permanent unless you sell. If your investment drops 20% but you hold it and it recovers to your original purchase price, your ROI returns to 0%. If it rises above that, your ROI becomes positive again.

ROI versus other return measures

ROI is simple and useful for a quick snapshot, but other measures tell you different things. Annualized return spreads the total ROI across years, so you can compare investments held for different lengths of time. Total return includes dividends or interest paid out during the holding period, not just price changes. Real return subtracts inflation, showing what your money actually buys.

For a single stock or a one-time investment you held for a year or two, basic ROI is usually enough. For a retirement account where you add money regularly, or for comparing funds held over different time periods, you need one of the other measures. Most investment platforms calculate these for you, but understanding what each one means helps you read the numbers correctly.

Frequently Asked Questions

Is a 10% ROI good?

That depends on the time period and what you are comparing it to. A 10% return in one year is strong for most investments. A 10% return over ten years is weak. Stock market averages historically run around 7% to 10% per year over long periods, so 10% annualized is roughly in line with the market. Bonds typically return less; savings accounts return much less.

How do I calculate ROI if I added money to my investment over time?

The basic ROI formula does not work if you made deposits or withdrawals. You would need to calculate a time-weighted return or internal rate of return instead. Most investment platforms do this automatically and show it on your statement. If you are doing it by hand, you would need to break the investment into periods between each deposit, calculate ROI for each period separately, then link them together mathematically.

Should I use ROI to decide whether to sell an investment?

ROI tells you what happened in the past, not what will happen next. A negative ROI does not mean you should sell, and a positive ROI does not mean you should hold. Your decision should depend on whether you still believe in the investment, how long you plan to hold it, and what else you could do with the money. Past performance does not predict future results.

Does ROI include taxes?

No. The basic ROI formula shows your gain before taxes. When you actually receive the money, you may owe income tax on the gains, which reduces what you keep. Tax-advantaged accounts like 401(k)s and IRAs delay or eliminate this tax, which is one reason they are valuable. Always calculate your after-tax return separately if you are comparing investments in regular accounts versus retirement accounts.