How to calculate ROI? Understand the formula and practical applications in one article.

What is ROI?

ROI (Return on Investment) simply means: how much you earned ÷ how much you invested. For example, if you invest 1 million to buy stocks and sell them for 1.3 million, the ROI is 30%. This metric is used in both personal finance and business management.

Core Formula

ROI = ( revenue - cost ) / invested capital × 100%

Practical Example: Stock Investment

Assuming you bought 1,000 shares of stock for $10,000 (at $10 per share), sold them a year later for $12.5 each, received $500 in dividends, and paid $125 in transaction fees.

• Total Revenue = 12.5×1000 + 500 = $13,000
• Total cost = 10×1000 + 125 = $10,125
• Net Income = $2,875
• ROI = 2,875 ÷ 10,000 = 28.75%

The key is not to overlook the costs; transaction fees and service charges must all be included.

ROI vs ROAS: Don't Get Confused

In the e-commerce and advertising circles, people often confuse these two concepts:

• ROI = ( profit ) / input cost
• ROAS = ( Total Revenue ) / Advertising Cost

ROI reflects the actual profit in cash, while ROAS only looks at revenue. The numbers for both are completely different.

Annualized ROI: Time is the key

When comparing two investment plans, you cannot just look at the total ROI. You also need to consider how long it took.

Annualized ROI formula = [( Total ROI + 1)^(1/Number of Years ) - 1] × 100%

For example:

• Plan A: Earn 100% in 2 years, annualized ROI = 41.4%
• Plan B: 200% profit in 4 years, annualized ROI = 31.6%

A seems to yield faster.

High ROI Investment Ranking (Risk is also increasing)

Cryptocurrency/Forex > Stocks > Index Funds > Bonds

Cryptocurrency indeed has the highest ROI, but the volatility is also the fiercest. If a certain coin's volatility is twice that of stocks, adjustments can be made to the position to balance the risk.

Methods to Improve ROI

The formula breaks down into two levers: increase profit or reduce costs.

1. Choose high-dividend stocks + Use low-fee brokers
2. Directly select high ROI targets (but consider volatility and valuation)
3. Use leverage tools like CFDs (which also carry high risks)

Avoid the Pitfalls of ROI

❌ Did not consider time: Project X's ROI of 25% seems better, but if it takes 5 years to earn that, while Project Y earns 15% in 1 year, then Y is actually stronger.

❌ Ignoring Risks: High ROI often comes with high volatility. Focusing only on numbers without looking at candlestick charts can lead to panic selling during a crash.

❌ Cost Calculation Missed: Real estate investment must account for interest, taxes, insurance, and maintenance. Missing these will lead to a serious overestimation of ROI.

❌ Only look at financial returns: Some non-financial returns from investments are valuable as well (environmental, social significance, etc.), which cannot be reflected in the ROI metric.

Summary: ROI is a powerful tool for comparing investments, but do not be blinded by the numbers themselves. It is essential to consider annualized returns, risk volatility, investment cycles, and hidden costs for a comprehensive judgment. For cryptocurrency investors, high ROI is tempting, but it is crucial to set stop-losses, as the volatility can be crazier than the ROI itself.