How ROI works
Return on investment is the most basic profitability check there is: how much did you make relative to what you put in? It works for anything with a cost and a payoff - a stock, a rental property, a kitchen remodel, an ad campaign. Because it ignores time, though, raw ROI can flatter slow investments: a 50% gain is excellent over two years and mediocre over fifteen.
That's why this calculator also reports the annualized return when you provide a holding period. Annualizing converts your total return into the steady yearly rate that would produce the same result, which is the only fair way to compare investments held for different lengths of time - or to judge any return against the long-run stock market benchmark.
Frequently asked questions
Why annualize ROI before comparing investments?
A 100% ROI sounds spectacular, but earned over 10 years it works out to only about 7.2% per year - roughly what a stock index fund has historically delivered. Always convert to an annualized rate before comparing investments held for different lengths of time.
What costs should I include in ROI?
Everything the investment actually cost you: purchase price, transaction fees, ongoing expenses, and taxes on the gains. For active investments like rental property or a side business, the value of your own time also reduces the true return.
What is a good ROI?
It depends on the risk you took. A useful benchmark is the roughly 7-10% per year that broad stock indexes have returned over long periods - a riskier investment should beat that by a clear margin to be worth it.