Recently, many people have been asking how to understand investment returns, so I’ve organized my understanding to share with everyone.

Simply put, ROI is an indicator that measures whether your investment is profitable. In straightforward terms, it’s your net profit divided by the initial investment, then multiplied by 100% to get a percentage. For example, if you spend 1 million dollars to buy a stock and later sell it for 1.3 million dollars, your ROI is (1.3 million - 1 million) / 1 million = 30%. It sounds simple, but in practice, there are quite a few details involved.

I’ve also calculated how to determine ROI for stocks. Suppose you buy 1,000 shares at $10 each, and after a year, you sell them at $12.5, while also receiving $500 in dividends and paying $125 in trading commissions. All income and costs need to be included. Total income is 12.5 × 1,000 + 500 = $13,000. Total costs are 10 × 1,000 + 125 = $10,125. Net profit is $2,875. Finally, dividing $2,875 by the initial investment of $10,000, the ROI is 28.75%.

There’s also an interesting point: many people involved in e-commerce or advertising talk about ROI, but they’re actually referring to ROAS, which is Return on Ad Spend. The difference is that ROI measures profit, while ROAS measures revenue. For example, if the cost of a product is $100, and it sells for $300, and you sell 10 units with $500 spent on advertising, the real ROI would be (3,000 - 1,500) / 1,500 = 100%, but the ROAS would be 3,000 / 500 = 600%. These two concepts are often confused, but their calculations are completely different.

I also learned about something called annualized ROI, which is more valuable than regular ROI because it considers time. For example, if Investment Plan A earns 100% in 2 years, and Plan B earns 200% in 4 years, how do we compare? We need to calculate annualized ROI. A’s annualized ROI is (1 + 1)^(1/2) - 1 = 41.4%, and B’s is (1 + 2)^(1/4) - 1 = 31.6%. So, A is actually more cost-effective, even though B’s total return looks higher.

How can you increase ROI to make more money? There are basically two ways: either increase profits or reduce costs. But honestly, these optimization methods have limited effects. The most straightforward approach is to choose investment targets with inherently high ROI. Generally, cryptocurrencies and forex have the highest ROI, followed by stocks, then index funds, and finally bonds. However, high ROI often comes with high risk, so when choosing, you also need to consider volatility and valuation.

Although ROI is a useful metric, it has limitations. First, it doesn’t account for time—an ROI of 30% achieved in one year is very different from 30% over five years. Second, high ROI usually indicates high risk; focusing only on the ROI number without considering risk can lead to losing everything. Also, when calculating ROI, some costs might be overlooked, leading to an inflated figure. For example, in real estate investment returns, many forget to include mortgage interest, taxes, and maintenance costs.

Therefore, when I evaluate investment opportunities now, I not only look at how ROI is calculated but also pay more attention to the risks behind that number. Reasonable return expectations can help you avoid excessive risks. When choosing investment targets, it’s also important to consider factors like volatility and valuation levels—ROI shouldn’t be the only criterion.