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What is ROI?
ROI stands for “Return on Investment,” a metric used to measure the profitability of an investment. It’s calculated as a ratio of the gain or loss made on an investment relative to the cost of the investment.
ROI is an important metric for investors, as it provides insights into the effectiveness of their investments and helps them make informed decisions about where to allocate their capital. A higher ROI indicates that the investment is generating a better return, while a lower ROI may indicate that the investment is not performing as well as expected or that the investor should consider alternative investments.
How to calculate ROI?
To calculate ROI, the formula is ROI = (Gain from Investment – Cost of Investment) / Cost of Investment. Here’s an example:
Let’s say an investor invests $10,000 in a stock and sells it for $12,000.
The ROI for that investment would be: ROI = ($12,000 – $10,000) / $10,000 = 0.2 or 20%
This means that the investment generated a 20% return on investment.
It’s important to remember that ROI is just one metric to consider when evaluating an investment and that many other factors, such as market conditions and the performance of similar investments, can impact an investment’s success. Additionally, it’s important to consider the time horizon for the investment, as investments with a longer time horizon may have a lower ROI but still be successful due to the compounding of returns over time.