investing

return on investment

A performance measure used to evaluate the efficiency of an investment, expressed as a percentage of the original cost.

Example

“Her investment of $10,000 grew to $13,000, giving her an ROI of 30%.”

Memory Tip

ROI = Return On Investment. What RETURNS to you ON your INVESTMENT.

Why It Matters

Return on investment helps you compare different investment opportunities on an equal basis. By understanding ROI, you can make informed decisions about where to put your money to maximize profits and build wealth over time.

Common Misconception

Many people assume that a higher ROI always means a better investment. However, higher returns often come with higher risk, and you must consider factors like time frame, liquidity, and your personal financial goals before making a decision.

In Practice

If you invest $10,000 in stocks and sell them two years later for $12,000, your ROI is 20 percent. This means you earned $2,000 in profit, which represents a 20 percent return on your original $10,000 investment.

Etymology

Return (the gain received) + on + investment (the money put in) — what you get back relative to what you put in.

Common Misspellings

return on investementreturn on investmntreturn of investment

Related Terms

profit capital gains yield

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