Investing Assets & Markets Stocks What Is Return on Investment? How to Calculate Return on Investment By Ken Little Ken Little Twitter Website Ken Little has more than two decades of experience writing about personal finance, investing, the stock market, and general business topics. He has written and published 15 books specifically about investing and the stock market, many of which are part of the well-known franchise, The Complete Idiot's Guides. As a freelance writer and consultant, Ken focuses on stocks, trading basics, investment strategy, and health care. His work has been featured in The Wilmington StarNews, The Daily Times, The Balance, The Greater Wilmington Business Journal, The Herald-News, and more. learn about our editorial policies Updated on January 10, 2022 Reviewed by JeFreda R. Brown Reviewed by JeFreda R. Brown Facebook Instagram Twitter JeFreda R. 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Their role as fact checker is to review articles for accuracy, update data as needed, and verify all facts by citing trusted sources. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Definitions and Examples 1. What Is Total Return? 2. What Is Simple Return? 3. What Is Compound Annual Growth Rate? Definition Return on investment (ROI) measures how profitable an investment is. Many times, it is expressed as a ratio or percentage. ROI provides a way to evaluate and compare assets or financial instruments. Photo: Justin Lewis / Stone/ Getty Images Definitions and Examples of Return on Investment Investors calculate return on investment in order to determine profit or loss compared to the cost of their portfolio. ROI tells how profitable investments are. It also allows a comparison of future investments for potential growth. How Do You Calculate Return on Investment? The most basic formula for calculating return on investment is: When it comes to determining ROI on an investment, things get a bit more complicated. That's because ROI in investing often involves trying to capture the value of money over time. Depending on your needs, there are some formulas that can help give you an idea of whether your investments are paying off. Some are more complex than others, but none is beyond the reach of the average person with a calculator. 1. What Is Total Return? Total return measures the profit earned from an investment over a set period of time. This metric includes dividends, making it a good way to measure the profitability of some stocks. Total return is often expressed as a percentage. Definition of Total Return Total return captures the combined value of an investment's profits over a set period of time, such as a quarter or a year. These profits may include interest, dividends, and the changing value of the investment. How Do You Calculate Total Return? It's simple math, but it reminds us that we need to include dividends (where appropriate) when finding the return of a stock. Here is the formula: For instance, if you bought a stock for $7,543, and it is now worth $8,876, you have an unrealized gain of $1,333. If you received dividends of $350 during this time, you could find your total return using these steps: ($8,876 - $7,543) + $350 / $7,543$1,333 + $350 / $7,543$1,683 / $7,543 In this case, the total return would be 0.2231 or 22.31%. Note You can use this calculation for any period, which is a weakness, since it doesn’t take into account the value of money over time. 2. What Is Simple Return? Simple return is similar to total return, but it is used to calculate your return on an investment after you have sold it. Definition of Simple Return Simple return calculates the value of your total profits on an investment, and it takes cost basis into account. How Do You Calculate Simple Return? You can find your simple return by using this formula: Let's assume that you bought a stock for $3,000 and paid a $12 commission. Your cost basis would be $3,012. If you sell the stock for $4,000 (with another $12 commission), your net proceeds would be $3,988. If your dividends came out to $126, you could figure out your simple return using these steps: $3,988 + $126 ÷ $3,012 – 1$4,114 ÷ $3,012 – 11.36 – 1 In this case, the simple return would be 0.36 or 36%. Like the total return calculation, the simple return tells you nothing about how long the investment was held. Tip If you want to see after-tax returns, simply substitute net proceeds after taxes for the first variable, and use an after-tax dividend number. 3. What Is Compound Annual Growth Rate? For investments held for more than one year, you may want to look at this more advanced, yet not much more complicated, calculation. Definition of Compound Annual Growth Rate The compound annual growth rate (CAGR) shows you the value of money in your investment over time. A 40% return over two years is great, but a 40% return over 10 years leaves much to be desired. Think of this calculation as the growth rate that takes you from the initial investment value to the ending investment value. This presumes that the investment has been compounding over the period. How Do You Calculate Compound Annual Growth Rate? To calculate the CAGR, use this formula: Divide the value of an investment at the end of the period by its value at the start of that periodTake that result, and raise it to the power of oneDivide it by the period length (n)Subtract one from that result CAGR is useful when comparing investments over time, but it does smooth returns over the comparison period. This can underemphasize risk in volatile investments. Key Takeaways Return on investment (ROI) is a measurement of the profitability of an asset or financial instrument.There are many different ways to calculate ROI, depending on your needs.Compound annual growth rate (CAGR) captures the value of an investment over time, but it may underemphasize risk. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Raymond A. Mason School of Business, William & Mary. "7 Accounting Terms to Know." Accessed March 18, 2021. Robinhood. "What Is Total Return?" Accessed March 18, 2021. Corporate Finance Institute. "CAGR." Accessed March 18, 2021.