How to Calculate Return on Investment (ROI): Formula and Examples
Learn the ROI formula, how to calculate it for a simple investment, and how it differs from compound annual growth.
The ROI Formula
ROI measures total gain or loss as a percentage of what you put in. It is a snapshot figure — it does not account for how long the money was invested.
Worked Example
You buy an investment for $2,000 and sell it later for $2,500.
Why Time Horizon Matters
A 25% ROI over 1 year is very different from a 25% ROI over 10 years. To compare investments held for different lengths of time fairly, annualize the return or compare using a compound growth model instead of raw ROI alone.
ROI vs. Compound Annual Growth
ROI answers "what did I gain overall?" while compound growth answers "how fast is this growing per year, assuming gains are reinvested?" Once you know your approximate annual return rate, you can project future growth with recurring contributions using a compound interest model.
Common Mistakes
- Ignoring fees and taxes when calculating the true cost or gain
- Comparing ROI across investments with very different time horizons
- Forgetting to include dividends or income received along the way
Conclusion
Once you have calculated your ROI and estimated an annual rate of return, use the Compound Interest Calculator to project how that return could grow over time with regular contributions.