Return on Investment (ROI)(by Mrinalini Krishna)

Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.

To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

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Why Is 'Return on Investment (ROI)' the Term of the Day?

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Return on investment (ROI), simply put, is a way to gauge how well or poorly your investments are performing. After all, investments are a way of putting your money to work and building wealth over time.

For example, if you bought $100 worth of shares of Company A and sold them for a $130, your ROI would be ($130-$100) / $100 or 30%. One of the biggest advantages of using ROI is that you can use it to make apples-to-apples comparisons of similar investments.

However, ROI is not a perfect metric to judge performance. Since ROI does not take into account the holding period for your investments, it misses the nuance of opportunity cost of not investing elsewhere. For example, an ROI of 10% could be better or worse than other options depending on how long you hold the investment.

-Mrinalini