What does ROI mean and how do you measure your investment return?

Introduction to Return on Investment

Whether you are an active day trader or prefer long-term investments, you must understand your results. One of the biggest advantages of trading is the ability to analyze performance with objective metrics. This can significantly reduce emotional and impulsive investment decisions.

The human mind tends to construct narratives around everything to understand reality. But numbers never lie. If your investments show negative returns, you need to revise your strategy. Conversely, if you feel that things are going well but the numbers contradict this, you need more objective data for your investment decisions.

Why is ROI important for your portfolio?

What does ROI actually mean? Return on investment (ROI) is a tool for measuring how profitable an investment is and for comparing different investment opportunities. It shows the relationship between profit or loss in relation to your original investment.

A positive ROI indicates profits, while a negative ROI shows losses. This metric applies not only to trading and securities but also to business acquisitions, real estate, and other business ventures. If you plan to start a restaurant, you should first calculate an estimated ROI based on expenses and expected revenue. If the business seems capable of generating a positive return, it may be worth pursuing the project.

How to calculate your return on investment

The formula for ROI is direct and applicable: