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Have you ever wondered how to calculate return on investment? If so, you’ve come to the right place. The actual formula to calculate return on investment is simple enough that you can perform on a basic calculator. Let’s take a look.
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Calculate Return on Investment Formula
Pretty straightforward right? Let’s walk through a calculation so that we are sure you have it down. Let’s say you purchased a stock for $1,000 and it is currently worth $1,600. Here is the breakdown of the return on investment calculation:
(Ending Value of Investment – Cost of Investment): $1,600 – $1,000 = $600
Next, take the $600 and divide that by the cost of the investment, $1,000 to arrive at the answer: 60%
Note that this formula will work if your ending balance is less than the cost of the investment. Your answer will be negative, which means you lost money on the investment. If you don’t feel actually performing the calculation, I have a calculator on my site that will do the math for you.
Importance of Return on Investment
Knowing the return of your investment is key for knowing whether or not your investments are profitable or not. In fact, there are many uses for the return on investment calculation:
- Investments: Stocks, bonds, etc.
- Resellers: If you buy something at a yard sale and resell it in eBay
- Landlords: determine which properties are most valuable to you
- Businesses: determine how much money certain products are generating. This can help you focus on higher producing items.
With all of these various ways to calculate the return on investment, you need to make certain you are using the correct inputs. Using the wrong values will give you the wrong answer and could prove to be very costly.
The Higher ROI The Better
Of course, you want to invest in the highest return on investment items the most. This is where the calculation really comes into play. Let’s say you have two products that you are selling. Below are the prices you paid for the item as well as how much you sold the item for.
Just by looking at the numbers, it looks like Item B is the more profitable product. But when we calculate return on investment, we see this is not the case.
Item A has a 100% return on investment while Item B has a return of investment of 62%. Both of these are great returns to have, but if you want the best return for your money, Item A is where it’s at. Every time you sell one, you are doubling your money.
Knowing how to calculate return on investment is key for understanding the best investment you can make. As you can see from the bullet points above, you can calculate return on investment for many industries and needs. The key is just knowing which inputs to use.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.