Return on investment
What is return on investment?
Return on investment (ROI)
is the gain or loss generated by interest rates, dividends, or market changes over a specific period of time, usually a year, and usually expressed as a percentage of the original investment. ROI is also known as rate of return.
Each investment has a different ROI, based on the cash flow expected in the future from the investment. The higher the risk, the higher the ROI you can expect.
How to calculate return on investment
To determine your ROI, divide the change in value, gain or loss, by your original investment. To find your annual return, expressed as a percentage or ratio, divide the change in value plus income at the end of the year by the amount invested at the start of the year.
ROI = (Change in value + dividends paid + interest paid)
(amount invested)
Be sure to include the transaction fees you pay when you buy and sell your investments.
Three ways to make money
There are three ways that investments make money:
- Investments that earn interest—examples: savings accounts, and Guaranteed Investment Certificates (GICs)
- Investments that pay dividends—examples: stocks that give investors a share of the profit a company makes
- Investments that you sell for a profit (capital gains)—examples: stocks, bonds, and mutual funds
Remember that these returns are all taxed differently. This can affect your returns, so it’s good to understand the applicable tax implications for you.