Scope and assumptions
Illustrative ROI math; excludes fees and compounding unless stated. Not investment advice.
A 15% return sounds great until you ask 15% of what — the gain or the total value? ROI anchors the percent to what you actually put in, so a $150 gain on $1,000 is 15%, not 15% of $1,150. And a return earned over five years isn't the same as one earned in one.
The formula
ROI % = (Gain ÷ Cost) × 100
The base is the cost (what you put in), not the final value.
Worked examples
| Cost | Gain | ROI % |
|---|---|---|
| $1,000 | $150 | 150/1000 × 100 = 15% |
| $500 | $100 | 20% |
| $2,000 | $300 | 15% |
| $1,000 | −$100 | −10% |
Annualizing, the time fix
A 15% gain over 2 years is not 15% per year. Use CAGR: (1 + 0.15)^(1/2) − 1 ≈ 7.2% per year. The simple "÷ years" (7.5%) is close but slightly overstates it.
Net of fees
That 15% is gross. Subtract trading fees, fund expense ratios, and taxes to get net ROI. A 15% gross return can shrink to single digits after a 1% fee and capital-gains tax, the number that actually lands in your pocket.
Simple vs compound over many years
Holding for a decade, a yearly 15% compounds: $1,000 → $1,000 × 1.15^10 ≈ $4,046. The percent looks the same each year, but the dollar outcome is exponential. ROI snapshots hide that curve unless you annualize.
Return Figures That Overstate Gains
Using final value as base (ROI divides by cost, not the end amount); ignoring time (a 15% two-year return isn't 15% per year, annualize to compare); forgetting fees (net ROI subtracts costs); mixing simple and compound (multi-year returns compound); comparing gross to net (always state which you mean); and treating one period's ROI as annual (quote the holding period).
Related industry guides
For the rest of the industry cluster, start at the hub: Percentage in Finance Interest. Adjacent: Percentage in Finance Interest and Percentage in Real Estate Commission.
FAQ
Why does the same ROI look different over 1 vs 10 years? Because of compounding — a 15% yearly ROI compounds to ~304% total over 10 years, not 150%. The holding period completely changes the dollar story.
How do I compare a 15% bond return to a 15% stock return? Only after adjusting for risk and time; the percent alone hides volatility and whether it's annualized. Two "15%" can mean very different risk.
Does ROI include dividends/reinvestment? Simple ROI on price gain ignores dividends and compounding from reinvestment; include them for total return, or the percent understates reality.
What's the difference between ROI and ROE/ROA? ROI measures return on a specific investment cost; ROE is return on equity (shareholders' funds), ROA on assets. Different bases, not interchangeable.
Why is net ROI lower than quoted? Fees, expense ratios, and taxes come off; a 15% gross can fall to single digits, and that net is what lands in your pocket.
Sources: Investopedia, Return on Investment; Khan Academy, Investment returns.
Disclaimer: Illustrative only, not investment advice. Real returns involve fees, taxes, and risk; consult a professional. Informational only.
Sources and references
- Investopedia — Return on Investmenthttps://www.investopedia.com/terms/r/returnoninvestment.asp
- Khan Academy — Investment returnshttps://www.khanacademy.org/economics-finance-domain
Maintenance and corrections
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