How to Calculate ROI (Return on Investment)
The ROI formula, common mistakes that overstate returns, and how to annualize a return for fair comparison across time periods.
Return on investment is one of the simplest formulas in finance — and one of the easiest to get wrong in practice, because getting it right depends on what you count as "invested" and what you count as "returned."
The Basic Formula
ROI = (Amount Returned − Amount Invested) / Amount Invested × 100%
If you put in $10,000 and end up with $12,000, that's a $2,000 gain on a $10,000 base — a 20% ROI. The formula itself is not the hard part.
The Mistake: Ignoring Real Costs
The "amount invested" should include everything you spent to make and hold the investment — not just the sticker price. Brokerage fees, closing costs, maintenance, or any other cost tied to the investment are real money at risk, and leaving them out inflates your ROI. A $10,000 investment with $500 in fees has $10,500 truly invested; using $10,000 as the base overstates the return.
The Other Mistake: Ignoring Income Along the Way
Some investments pay you before you ever sell — dividends from stocks, rent from a property, interest from a bond. That income is part of your return and belongs in the numerator, not just the change in the asset's price. A property that gained little in value but paid steady rent might have a much better ROI than its price change alone suggests.
Why Annualizing Matters for Comparison
A 20% ROI over six months and a 20% ROI over five years are very different outcomes, but the basic formula treats them identically. To compare fairly, convert to an annualized rate using the compounding formula, not simple division:
Annualized ROI = (Total Returned / Total Invested)^(1/years) − 1
Dividing by years instead of using this formula understates how good a short-term return actually is and overstates how good a long-term one is, because it ignores that returns compound rather than accumulate in a straight line.
Putting It Together
Calculate ROI using the total amount genuinely at risk (including fees), add in any income received along the way, and annualize the result if you want to compare it against a different investment held for a different length of time.
The ROI calculator handles all three steps automatically — enter your costs and any income received, and it reports both your straight ROI and the correctly annualized figure.