Recently, a friend asked me how to calculate ROI, and I realized that many people are still a bit unclear about the concept of return on investment. In fact, ROI is an indicator that measures how much profit you can make from your investment. Simply put, it’s the amount of money you earned divided by the amount you invested, and then multiplied by 100% to get a percentage.

The simplest example is: you spend 1 million to buy a stock, and later sell it for 1.3 million. How do you calculate your ROI? It’s (1.3 million − 1 million) / 1 million = 30%. It looks simple, right? But in real-world practice, it can get a bit more complicated because you need to factor in things like trading fees and dividends.

Let me tell you a real-life example of a stock investment. Suppose you buy 1000 shares at 10 yuan per share. After one year, you sell them at 12.5 yuan, and you also receive 500 yuan in dividends. Your trading fees are 125 yuan. If you calculate it this way, your total income is 12.5 × 1000 + 500 = 13,000 yuan. Your total cost is 10 × 1000 + 125 = 10,125 yuan. Your net profit is 2,875 yuan. Dividing 2,875 by your initial investment of 10,000 yuan, your ROI is 28.75%.

When it comes to how to calculate ROI, there’s another concept that’s easy to confuse with it called ROAS, especially in the e-commerce and advertising industries. Many people mix these two up. ROI measures profit, while ROAS measures revenue. For example, if your product costs 100 yuan, and you sell it for 300 yuan. You sell 10 units through ads, and your advertising cost is 500 yuan. Then ROI = (300 × 10 − 100 × 10 − 500) / (100 × 10 + 500) = 100%, but ROAS = (300 × 10) / 500 = 600%. The difference between the two numbers is huge, right?

There’s also an upgraded version called annualized ROI, which converts returns from different investment time periods into an annualized level, so you can compare them more fairly. For instance, Project A earns 100% over 2 years, and Project B earns 200% over 4 years. At first glance, it seems like B earned more, but once you annualize it, A is 41.4% and B is 31.6%, so A is actually the better deal.

To improve ROI, there are basically two approaches: either make more money, or spend less. For stocks, you can choose stocks with higher dividends, find brokers with lower fees, and reduce the number of trades. But honestly, these optimizations are limited in their effect. The most direct way is to choose investment products that already have a high ROI. Generally speaking, the ROI of cryptocurrencies and forex tends to be higher than stocks, and stocks tend to have higher ROI than funds and bonds.

However, you should note that high ROI is usually accompanied by high risk. So when choosing high-return investments, you also need to look at indicators like volatility and valuation. For example, consider two index funds: one has a PE percentile of 70% and the other is 50%. Clearly, the one with 50% carries less risk, and the potential return may actually be higher.

Finally, a reminder: although ROI is useful, it also has limitations. First, it doesn’t consider time—getting the same 30% ROI is completely different when earned over 1 year versus over 5 years. Second, high ROI often implies high risk; if you only focus on the ROI number and ignore risk, you may end up losing money. Third, if you omit certain costs when calculating ROI, the result can be overstated. For example, with real estate investments, you need to include mortgage interest, taxes, insurance, and maintenance fees; otherwise, the return rate will appear artificially high.