The more money you make compared to the money you put into an investment, the better the investment. That’s just common sense. However, it helps to have a more precise method to evaluate investment performance. Your rate of return on an investment (also called return on investment or ROI) is usually expressed as a percentage of the total investment. That makes it easier to compare how well investments of different sizes and types are doing.
Compute your total investment. Include all costs, not just the price. For example, if you want to calculate rate of return on a stock or bond investment, you should add any broker’s fees or other transaction costs to the purchase price to find your total investment.
Calculate the value of the investment at the end of one year. For example, with a stock investment, multiply the price per share at year’s end by the number of shares.
Subtract the total investment from the investment value at the end of the year. Add any dividends or interest payments you received but did not reinvest. The result is your return on the investment in dollars.
Divide the return in dollars by the total investment and multiply by 100 to express as a percentage. This is your rate of return or ROI. Suppose your total investment in a stock is $1,000 and the stock is worth $1,100 at years end. Let’s say the stock also paid $50 in dividends. Your return in dollars is $150. $150 divided by $1,000 and multiplied by 100 gives you a rate of return of 15 percent.
- Return on investment is figured pretty much the same way for all investments. However, the details vary. For instance, the total investment for a business is the business’s net worth plus its total debt. The return in dollars is the after-tax profit the business earned.
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- How Does Return on Investment Work?