Whether you're buying a stock, a rental property, or a new piece of software for your business, the ultimate question is always: Is this worth the cost? Return on Investment (ROI) is the metric that gives you the answer.
How ROI is Calculated
The basic ROI formula is simple: take the net profit of the investment, divide it by the original cost, and multiply by 100 to get a percentage.
Annualized ROI: The Real Comparison
Standard ROI has one major flaw: it doesn't account for time. A 50% return is amazing if it takes 1 year, but mediocre if it takes 10 years.
To compare different types of investments (like a house vs. a crypto coin), you should use Annualized ROI. This tells you what your average yearly return is, allowing for an "apples-to-apples" comparison.
Factors That "Eat" Your ROI
- ● Taxes: Capital gains taxes can take a significant bite out of your final net profit.
- ● Inflation: If your ROI is 5% but inflation is 6%, you are technically losing purchasing power.
- ● Fees: Trading commissions, management fees, and maintenance costs should always be subtracted from your profit.
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