Unveiling ROI Investment Return Rate: From Zero Basics to Mastery of Calculation and Application

What is ROI? Understand Investment Return Rate in One Sentence

Return on Investment (ROI) is essentially a metric to measure the efficiency of “making money from money.” Simply put, ROI is the ratio of how much profit you make from an investment of 100 units of currency. The formula is: profit generated from the invested amount ÷ invested amount × 100%.

This concept may sound complicated, but it’s especially practical in investment decisions—whether for personal finance or business project evaluation, ROI is an essential key indicator.

Detailed Explanation of ROI Calculation Formula and Examples

Basic ROI Formula

ROI = (Net profit - Investment cost) ÷ Investment cost × 100%

Or: ROI = Net profit ÷ Total investment × 100%

It sounds simple, but in practice, determining “net profit” and “investment cost” is often not so straightforward.

How to Calculate ROI in Stock Investment

Suppose you buy 1,000 shares of a stock at $10 per share, investing a total of $10,000. After one year, you sell at $12.5 per share, earning $500 in dividends, but paid $125 in transaction fees.

Total income = 12.5 × 1000 + 500 = $13,000
Total costs = 10 × 1000 + 125 = $10,125
Net profit = 13,000 - 10,125 = $2,875
ROI = 2,875 ÷ 10,000 × 100% = 28.75%

This is the actual return rate of your investment.

ROI in E-commerce and Advertising Scenarios

In e-commerce operations, the ROI calculation differs slightly:

ROI = (Total sales - Cost of goods) ÷ Cost of goods × 100%

For example, a product costs 100 yuan, sells for 300 yuan. With 500 yuan spent on advertising, selling 10 units:

Total sales = 300 × 10 = 3,000 yuan
Total costs = 100 × 10 + 500 = 1,500 yuan
ROI = ((3,000 - 1,500)) ÷ 1,500 × 100% = 100%

This indicates that for every 1 yuan spent on advertising, you recover 2 yuan in profit.

ROAS and ROI: Two Concepts That Are Easy to Confuse

Many e-commerce and advertising practitioners often confuse ROAS (Return on Ad Spend) and ROI.

ROAS = Revenue from sales ÷ Advertising cost

Key differences:

• ROI measures profit (revenue minus all costs)
• ROAS measures revenue (how much sales are generated from advertising)
• ROI considers all costs (product cost + advertising cost)
• ROAS only considers advertising cost (ignores product cost)

Using the same example: ROAS = 3,000 ÷ 500 = 600%

It looks more impressive, but it only reflects sales generated by advertising without deducting product costs. Therefore, industry insiders often colloquially refer to “ROI,” but they might actually mean ROAS.

Annualized ROI: Don’t Be Deceived by Time

Suppose you have two investment options: A yields 100% over 2 years, B yields 200% over 4 years. Which one to choose?

Many would pick B because 200% > 100%. But this ignores the crucial factor—time.

Annualized Return = [(1 + Total return)^(1/years) - 1] × 100%

Calculations:

• For Option A: [(1 + 1)^(1/2) - 1] × 100% = 41.4% per year
• For Option B: [(1 + 2)^(1/4) - 1] × 100% = 31.6% per year

The result is reversed! Option A has a higher annualized return and is the better choice. This illustrates why comparing investments should always be done using annualized ROI, not total ROI.

ROI, ROA, ROE: Three Key Financial Indicators of a Company

If you study listed companies, you’ll often see these three metrics. They all involve “return rate,” but their meanings are entirely different:

Example: A company with total assets of 1 million (50% debt, 50% equity), invested 100,000 in a project, and recovered 200,000:

• Project ROI = (200,000 - 100,000) ÷ 100,000 = 100%
• If annual profit is 1.5 million, ROA = 1,500,000 ÷ 1,000,000 = 150%
• ROE = 1,500,000 ÷ 500,000 = 300%

You can see ROE is the highest because shareholders’ equity is the smallest. This explains why some companies appear to have modest profits but high ROE.

How to Achieve Higher Investment Returns

From the ROI formula, increasing returns can be achieved via two main routes:

Route 1: Increase profits

• Choose high-dividend stocks
• Seek assets with growth potential
• Optimize investment portfolio to favor high-yield assets

Route 2: Reduce costs

• Use low-fee trading platforms
• Decrease trading frequency to lower transaction costs
• Compare different investment channels to select the lowest-cost options

Honestly, the effects of micro-optimizations are often limited. The most direct method is to pick the right investment targets.

Generally, the long-term average ROI ranking of different assets is approximately: Cryptocurrencies & Forex > Stocks > Index Funds & Mutual Funds > Bonds

But note that higher ROI usually comes with higher risk. Cryptocurrency annualized returns can reach 50%+, but volatility might wipe out your gains overnight. So, when choosing high-ROI assets, always consider volatility, valuation, and other risk indicators.

Common High-Yield Investment Methods

( 1. CFD Trading

CFD (Contract for Difference) is a leveraged trading tool with low margin requirements. For example, stock CFDs may require only 20% margin.

Suppose you have $10,000, and you use $2,000 to open a CFD position. If you earn $500 profit, ROI is 25% (500 ÷ 2000). Leverage amplifies gains here.

But leverage is a double-edged sword—it magnifies both gains and risks.

) 2. Forex Margin Trading

The forex market is the largest global trading market. Using two-way trading and leverage, returns can reach over 30%, and trading is available 24 hours.

The downside is that forex is heavily influenced by international politics and economics, requiring high market sensitivity and risk management skills. Setting proper stop-loss and take-profit levels is key to protecting capital.

3. Gold Investment

Gold is a traditional safe-haven asset with preservation and appreciation functions. In recent years, gold prices have shown an overall upward trend, especially during global economic volatility, when demand increases.

The downside is that gold’s annualized return is relatively low, mainly serving to reduce overall portfolio risk.

4. Stock Investment

The stock market has become quite mature after hundreds of years. Historical data from the US stock market over the past 200+ years shows an average annual return exceeding 12%. Plus, US stocks have valuation advantages and high dividend yields, making them attractive for long-term investors.

Four Common Pitfalls to Avoid When Using ROI

Although ROI is a very practical metric, it also has obvious limitations.

Pitfall 1: Ignoring the Time Dimension

Two projects have ROI of 25% and 15%, respectively. The first seems better. But if the first takes 5 years, and the second only 1 year, the conclusion is completely reversed.

Solution: Always compare using annualized ROI, not total ROI.

Pitfall 2: High ROI = High Return? Not Necessarily

High ROI often indicates high risk. An investment with a very high ROI might be highly volatile, risking losses in the first year, leading to panic selling.

Solution: While focusing on ROI, also consider volatility, maximum drawdown, and other risk metrics.

Pitfall 3: Overestimating ROI

Omitting certain costs when calculating ROI can seriously inflate the figure. For example, in real estate investment, ignoring mortgage interest, property taxes, insurance, and maintenance costs will overstate ROI.

Solution: List all possible costs to ensure no omissions.

Pitfall 4: Only Focus on Financial Returns, Ignore Other Values

ROI measures only financial returns, but some investments also bring social or environmental benefits. Relying solely on ROI to evaluate such projects can undervalue their true worth.

To address this, concepts like “Social Return on Investment” (SROI) have been proposed to quantify social benefits.

Summary: What is ROI and How to Use It

What is ROI? Ultimately, it’s a financial metric to measure investment efficiency, indicating how much profit you generate from every 100 units invested.

How to use it? When making investment decisions, ROI is a must-watch indicator, but it should be combined with annualized calculations, risk assessments, and multi-dimensional comparisons to make more rational choices. Remember: there’s no investment that makes big money just by looking at ROI numbers alone; comprehensive analysis is always necessary.