Calculating return on investment, or ROI, is one way to evaluate how an investment is performing. You’re essentially comparing what you paid for an asset versus its current value. If ROI is positive, the investment is delivering a return—and the higher the ROI, the better the performance. If ROI is negative, you’d lose money if you sold the investment. Here’s how to calculate ROI, and how it could help inform what next steps you take.
How to calculate ROI
There may be nuances to calculating ROI, depending on the investment type. But generally, the way to calculate ROI for an investment is to use a straightforward formula: You subtract an investment’s total cost (including any fees you paid on top of the purchase price) from the total proceeds (including extra payments, like interest, in the case of bonds). Then divide that number by the investment’s total cost.
ROI formula
Below is the basic formula to calculate ROI:
Investment’s total proceeds – investment’s total cost
Investment’s total cost
Take the difference between the 2 numbers and multiply it by 100 to get a percentage.
Here’s an example: Let’s say you bought 100 shares of an investment at $20 per share, for a total of $2,000. You did not pay extra fees. If you decide to sell the investment, and it’s trading for $26 per share, that would put the total proceeds (not just profit) at $2,600. So what’s your ROI?
ROI formula step 1
2,600 (investment proceeds) – 2,000 (investment cost) = 600
2,000 (investment cost)
And 600/2,000 = 0.3
ROI formula step 2
0.3 x 100 = 30% ROI
ROI for stocks formula
When calculating ROI for stocks, be sure to factor in any dividends you’ve received. These are periodic payments some companies issue to shareholders as a way of passing on a portion of their profits.
The ROI for stocks formula is:
(Final stock price ‒ initial stock price) + dividends
Initial stock price
Here’s an example: Let’s say you buy a single stock share for $50, and then the value increases to $60 a year later. You also received a $2 dividend within that time.
ROI for stocks formula step 1
(60 [final stock price] – 50 [initial stock price]) + 2 (total dividend payments) = 12
50 (initial stock price)
And 12/50 = 0.24
ROI for stocks formula step 2
0.24 x 100 = 24% ROI
Be sure to account for any trading costs or fees you may have paid along the way by adding those to the total costs number in the formula.
ROI for bonds formula
The formula to calculate ROI for a bond requires knowing the coupon rate. That’s the annual percentage of interest the issuer pays the bond owner, and it factors into your total proceeds.
Imagine you buy a bond for $1,000 with a coupon rate of 6%. You’ll earn $60 annually (1,000 x 0.06 = 60). Now let’s say you can sell the bond for $1,050 after holding it for 3 years and earning $180 ($60 per year for 3 years). Here’s what the ROI formula would look like:
ROI for bonds formula step 1
(1,050 [final bond price] – 1,000 [initial bond price]) + 180 (interest)
1,000 [initial bond price]
And 230/1,000 = 0.23
ROI for bonds formula step 2
0.23 x 100 = 23% ROI (or about 8% per year)
A more accurate calculation would consider inflation if you held the bond for several years. One way to account for that is to subtract the inflation rate from your annual ROI. Let’s say the current inflation rate is 3%. That means that in the example above, your real annual return would be around 20%.
Benefits of calculating ROI
Calculating ROI could allow you to do the following:
You could buy more high-performing investments
Calculating ROI could help you decide what to invest in, whether that’s stocks, bonds, mutual funds, real estate, gold, or any other asset. Even though past performance can’t guarantee future results, a long track record of high ROI might motivate you to invest in more of the same or similar assets. Keep in mind that the tradeoff of a high ROI is higher risk. Likewise, specific investments with low or negative ROI might spur you to direct your money elsewhere.
You could rebalance your portfolio appropriately
As investments lose or gain value, the changed proportion of your total portfolio you hold in each investment type might not fit your strategy anymore. Rebalancing involves reviewing your holdings, then buying and selling assets to maintain your desired allocation that’s aligned with your goals, risk tolerance, and time horizon. Learn more about rebalancing in 4 steps.
Limitations of calculating ROI
The basic formula to calculate ROI isn’t perfect. Here are some important shortcomings to consider:
It doesn’t account for inflation
Inflation can eat into your investment gains over time. It takes an extra step to account for inflation’s effect over the time you’ve held the investment to get a more accurate ROI.
It doesn’t consider holding periods
This is important if you’re comparing the ROI of investments you’ve held for different lengths of time. For instance, if the ROI of an investment you’ve had for 1 year is 5%, and the ROI for another you’ve had for 10 years is 10%, it may look like the second investment performed better. But actually, the latter’s annual return is lower.
It doesn’t consider your risk tolerance
Some investments carry more risk than others. These generally could have a higher ROI, but the risk might not be worth it to you or match your personal tolerance levels. For instance, the ROI on money held in a traditional savings account may be low, but so is your risk. On the flip side, the potential for returns on stocks in a brokerage account could be much higher, but you’ll likely experience market ups and downs.
It doesn’t factor in your goals
Your investment strategy should be built around your unique financial goals, financial situation, time horizon, and risk tolerance. From there, you can choose assets to help move you in the right direction. For some, that could mean investing in companies aligned with their values or in bonds that support projects they care about. In other words, investing decisions are about more than a single ROI number.
What is a good ROI?
A good return on investment depends on the investment type, overall financial environment, and risk. Consider consulting historical averages for the investment type and weighing those against current performance for an idea of how strong the ROI is. For instance, the S&P 500®, widely considered as a gauge for total stock market performance, has had an average annual return of over 10% since it started tracking 500 companies in 1957 through 2024. As a result, some investors may consider an ROI above that benchmark strong for stocks and mutual funds composed of stocks. However, remember that a higher ROI is associated with more risk, so bonds’ relatively lower historical ROI could sound better to someone with lower risk tolerance.