ROI meaning in one sentence
Rate of return, or ROI (return on investment), is the gain or loss on an investment divided by the amount you put in, usually shown as a percentage.
A positive ROI means the investment gained value. A negative ROI means it lost value.
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How to calculate ROI
Use these letters:
- C: the amount invested, including the costs of buying.
- V: the value when you sell or measure, after the costs of selling.
- I: any income received in between, such as dividends or interest.
ROI = (V − C + I) ÷ C, then express the result as a percentage.
Worked example (hypothetical)
A trader buys shares for an amount C, including the broker's commission. Later the trader sells them and receives V after the selling commission. During the holding period the trader also receives a dividend I.
The gain is V − C + I. Dividing that gain by C gives the ROI. If V plus I is smaller than C, the result is negative. That means the trader lost part of the money put in.
To run this with your own figures, use the tools on the calculators page.
Where the term appears
- Trading platforms and reports: MetaTrader reports and an account statement show profit and loss per trade and for a period. You compare that result with the money deposited to get a return. The equity curve shows the same result over time.
- Fund and bank documents: mutual funds and savings products publish past returns. Deposits quote an interest rate, which is a promised rate of return before tax and inflation. See saving, investing and loans.
- News: reports on markets, companies and government bonds use "return" for price change plus income over a stated period.
Formal definition and edge cases
The simple ROI above is a holding-period return. It ignores time and cash flows during the period. Experienced readers should check these points:
- Time: a ROI earned over a long period and the same ROI earned over a short period are not equal. To compare them, convert to an annualized return or CAGR.
- Deposits and withdrawals: if money is added or taken out mid-period, simple ROI is distorted. A time-weighted return removes the effect of cash flows and measures the strategy. A money-weighted return (internal rate of return) measures the investor's actual result.
- Leverage: with CFDs and forex, return can be measured on margin or on the full position size, and the two give very different figures. Leverage magnifies losses as well as gains. Leveraged CFD and forex trading can lose money fast. See risk management.
- Costs: spread, commission and swap fees reduce the return. Gross ROI before costs overstates the result.
- Currency: a return measured in the account currency can differ from the return in PKR once currency risk is included.
- Inflation: nominal return is the headline figure. Real return subtracts inflation and shows the change in purchasing power.
- Benchmark: a return means more when compared with an index or a deposit rate. Alpha measures return above a benchmark.
Related terms
Capital gain and loss, accrued interest, coupon, basis point, exposure, trading glossary.
Frequent questions
Is rate of return the same as ROI?
In everyday use, yes. Both mean gain relative to the amount invested. Formal texts may use "rate of return" for a figure tied to a specific period.
Can ROI be negative?
Yes. A negative ROI means the final value plus income is below the amount invested.
Does ROI include fees?
It should. Include buying and selling costs, and swaps for positions held overnight. Otherwise the figure overstates the result.
Why does a past ROI not show what will happen next?
Past returns describe a period that has ended. They do not predict future results, and the same investment can gain or lose in the next period.