How can you earn more from your investment returns? A deep understanding of the core logic and application of ROI

Want to know how much your investment can actually earn? The answer is the Return on Investment (ROI). This metric is widely used in stock, cryptocurrency, forex, gold, and other financial markets to help investors evaluate the profitability of their funds. This article will explain in detail how to calculate ROI, its practical applications, and how to avoid common pitfalls.

What is ROI? Understanding the core concept in one sentence

Return on Investment (ROI) is how much your invested money has earned, usually expressed as a percentage.

More precisely, it measures the ratio of net profit and loss to the initial investment amount. Net profit and loss equal the investment income minus the investment costs. This indicator is not only used for personal financial decisions but also by companies to assess the efficiency of various investments and compare the profitability of different projects or departments.

Overview of ROI calculation formulas

The logic behind ROI calculation is simple:

ROI = (Total Revenue - Total Cost) / Total Cost × 100%

Or expressed as:

ROI = Net Profit / Initial Investment × 100%

Let’s look at a real example. If you buy a stock for 1 million and sell it after a year for 1.3 million, then ROI = (130 - 100) / 100 = 30%. However, in real investments, the composition of income and costs is often more complex.

Practical ROI calculations for different investment assets

( Stock Investment ROI Calculation

Using specific numbers. Suppose you buy 1,000 shares at $10 each, and after a year, you sell at $12.5, receiving $500 in dividends, with a total commission of $125.

Total Revenue = 12.5 × 1,000 + 500 = $13,000
Total Cost = 10 × 1,000 + 125 = $10,125
Net Profit = 13,000 - 10,125 = $2,875
ROI = 2,875 / 10,000 × 100% = 28.75%

) ROI in Product Sales and ROAS

Many e-commerce or advertising professionals hear the term ROI, but they often refer to a different concept.

Suppose the product cost is $100, selling price is $300, and you sell 10 units through advertising, with an ad spend of $500.

Actual ROI = [(300 × 10) - (100 × 10) + 500] / (100 × 10 + 500) × 100% = 100%

However, the industry often refers to “ROI” as ROAS (Return on Ad Spend):

ROAS = Total Sales Revenue / Advertising Cost = (300 × 10) / 500 = 600%

The key difference: ROI measures profit margin, while ROAS measures revenue multiple. ROAS only considers advertising costs and does not include product costs.

( Corporate ROI, ROA, and ROE comparison

When evaluating corporate investments, three common indicators are used:

Example: A company with assets of $1 million (including $500,000 debt and $500,000 equity). An investment of $100,000 returns $200,000 after 3 months, ROI = (200 - 100) / 100 = 100%. If the annual profit is $1.5 million, then ROA = 150 / 100 = 150%, and ROE = 150 / 50 = 300%.

Annualized return: solving the time comparison problem

Regular ROI has a fatal flaw—it doesn’t consider time. If project A earns 30% in 3 years and project B earns 30% in 1 year, which is better? The annualized return solves this problem.

Annualized Return )%### = [(1 + Total Return)^(1 / Number of Years)] - 1 × 100%

Compare two schemes: Scheme A with 100% total return over 2 years, Scheme B with 200% over 4 years.

A’s annualized return = [(1 + 1)^(1/2)] - 1 × 100% = 41.4%
B’s annualized return = [(1 + 2)^(1/4)] - 1 × 100% = 31.6%

The result shows A is better, demonstrating the value of annualized return.

How to improve your investment ROI

From the formula, increasing ROI can only be achieved through two ways: increase returns or reduce costs.

1. Choose high-ROI investment assets

Generally, the ranking of asset returns is:

Cryptocurrency & Forex > Stocks > Index Funds & Mutual Funds > Bonds

Cryptocurrencies and forex are highly volatile, with short-term returns exceeding 50%; stocks typically yield 10-15% annually; bonds are more stable but offer limited returns. Choosing assets that match your risk tolerance is the first step.

( 2. Amplify gains using derivatives

CFD trading (Contracts for Difference) is popular among short-term traders. For example, with stocks, CFDs often require only 20% margin. Holding $10,000 worth of stock, you only need $2,000 to participate. If you earn $500, the return rate is 25%, with leverage clearly amplifying gains.

Forex margin trading also offers leverage, with the largest global trading volume, high liquidity 24/7, and sometimes returns exceeding 30%.

) 3. Optimize trading costs

Choose brokers with low commissions and reduce unnecessary trades. For stock investments, selecting high-dividend stocks, lowering trading frequency, and choosing brokers with low fees can directly boost final returns.

( 4. Use other indicators to assist decision-making

Don’t rely solely on ROI figures. Compare volatility and valuation levels when investing. If cryptocurrency volatility is twice that of stocks, you can adjust your position ratio to 1:2 to balance risk. When selecting stocks, consider PE percentile; stocks with lower PE percentile within the same index tend to have lower risk and higher potential returns.

Three major pitfalls in using ROI

) 1. Ignoring the time factor leads to biased decisions

Project X’s ROI of 25% sounds better than Project Y’s 15%, but if X takes 5 years and Y only 1 year, the conclusion is completely reversed. Always compare using annualized return.

( 2. High returns often come with high risks

A 50% annual increase in cryptocurrency sounds attractive, but there’s also a possibility of a 60% decline in a year. Pursuing high ROI without considering volatility and risk may lead to losses instead of profits.

) 3. Incomplete cost calculations can overstate ROI

When evaluating real estate investments, many only look at property appreciation, ignoring hidden costs like mortgage interest, property taxes, insurance, and maintenance. These expenses can significantly eat into the nominal high returns. Accurately calculating all costs is essential for a true ROI.

Conclusion

ROI is a core metric for evaluating investment effectiveness, but it’s not the only standard. Understanding how to calculate ROI, comparing annualized returns, recognizing the risk features of different assets, and making informed decisions are crucial for smarter investments in stocks, cryptocurrencies, forex, gold, and more. High returns and low risks are often hard to achieve simultaneously. Choosing suitable assets based on your risk tolerance and investment horizon is more important than blindly chasing the highest ROI.