Master ROI in One Article: The Complete Guide from Beginner to Expert on Investment Returns

What is ROI? Why Investors Must Understand It

Return on Investment (ROI) sounds complicated, but it’s actually just one sentence: How much money you made from your investment, expressed as a percentage.

Strictly speaking, ROI (Return on Investment) is a core financial metric used to measure profitability. It’s not only used by individual traders in stocks or cryptocurrencies but also by companies to evaluate project efficiency, and even by e-commerce practitioners to assess advertising effectiveness.

Why understand ROI? Because it allows you to quickly judge: Is this investment worth doing?

ROI Calculation Formula: It’s Actually Very Simple

ROI = (Net Profit - Investment Cost) / Investment Cost × 100%

Or in another way: ROI = Net Profit / Total Investment × 100%

Simply put: How much money you earned ÷ How much you invested.

Here’s a straightforward example: You spend 1 million dollars to buy a stock, and later sell it for 1.3 million dollars, then ROI = (1.3 million - 1 million) / 1 million = 30%. This means your money grew by 30%.

But in reality, it’s not that simple. Buying and selling stocks involves fees, taxes, and possibly other hidden costs, which must be deducted from the gains.

How to Calculate ROI in Three Typical Scenarios

Stock Investment: Include dividends and fees

Suppose you buy 1,000 shares at $10 each, sell them a year later at $12.5, and receive $500 in dividends. The total transaction commission is $125.

Calculation:

• Total income = 12.5×1000 + 500 = $13,000
• Total cost = 10×1000 + 125 = $10,125
• Net profit = 13,000 - 10,125 = $2,875
• ROI = 2,875 / 10,125 ≈ 28.75%

Key point: Dividends and transaction fees must be included—nothing can be omitted.

E-commerce Advertising: Don’t confuse ROAS with ROI

This is a common pitfall. E-commerce operators often say “My advertising ROI is 600%,” but what they’re actually referring to is ROAS (Return on Ad Spend).

The calculation is completely different. Suppose the product cost is $100, selling price is $300, and you spend $500 on ads to sell 10 units:

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

ROAS calculation: (300×10) / 500 = 600%

Where’s the difference? ROI considers the final profit, while ROAS only looks at revenue. ROI’s costs include product cost plus advertising cost; ROAS only considers ad spend.

One reflects actual profit, the other just revenue. For business, looking at ROI is more reliable.

Cryptocurrency Trading: CFD vs Spot ROI Differences

This is what crypto enthusiasts care about most. Take CFD trading as an example: it uses margin (leverage), so ROI looks especially attractive.

For example, with $10,000, trading CFDs on stocks requires only 20% margin, i.e., $2,000. If this trade earns $500, ROI = 500 / 2000 = 25%. In contrast, using full capital for spot trading yields only 5% ROI.

That’s why some people are obsessed with CFDs—using the same money, ROI can multiply fivefold. But don’t forget, leverage also multiplies the risk fivefold.

Annualized ROI: Clarifying the Time Dimension

This is a point many overlook. Suppose Project A earns 100% in 2 years, and Project B earns 200% in 4 years— which is better?

Looking only at numbers, B seems more profitable. But—

Annualized ROI formula: Annual Return Rate(%) = [(Total Return + 1)^(1/Years) - 1] × 100%

For A: [(1+1)^(1/2) - 1] × 100% ≈ 41.4%

For B: [(2+1)^(1/4) - 1] × 100% ≈ 31.6%

A grows about 41.4% per year, B about 31.6%. From this perspective, A is the better choice.

That’s why you should look at annualized ROI—it reveals the true efficiency of your investment.

ROI vs ROA vs ROE: The Three Major Company Financial Indicators

If you want to evaluate a company’s profitability, you need to understand the differences among these three metrics:

For example, a company with assets of $1 million, of which $500,000 is debt and $500,000 is equity, invests $100,000 in a project that returns $200,000.

• Project ROI = (20 - 10) / 10 = 100%
• Total profit for the year = $1.5 million, so ROA = 150 / 100 = 150%
• ROE = 150 / 50 = 300%

The same money, viewed from different angles, yields very different numbers. That’s why some companies show high ROI but low ROE—they use a lot of leverage.

How to Improve Your Own Investment ROI

From the formula, there are only two ways to increase ROI: increase returns or reduce costs.

The most direct method: choose assets with high ROI. Generally:

Cryptocurrency & Forex > Stocks > Indexes & Funds > Bonds

But this comes with a premise—high ROI is usually accompanied by high risk. Cryptocurrencies have a volatility of 7, stocks about 3. You can adjust your portfolio accordingly: allocate less to high-volatility assets and more to stable ones to balance risk.

Another approach is to look at valuation. For the same index, Index A’s PE percentile (current valuation level) is 70%, Index B’s is 50%. B has lower risk and potentially bigger returns because there’s more room to grow.

Specific high-ROI investment methods include:

1. CFD Trading — Leverage makes ROI look very high, but risk multiplies. Suitable for experienced traders.

2. Forex Margin Trading — The largest financial market by daily volume, with sometimes over 30% returns, but requires high experience and risk management.

3. Gold — A hedge and store of value, grew 18.4% in 2019, often used as a safe haven during economic instability.

4. Stocks — For example, US stocks have an average annual return of over 12% over nearly 200 years, relatively stable, suitable for long-term holding.

Common Pitfalls When Using ROI

1. Ignoring the Time Dimension

Project X’s ROI is 25%, Project Y’s is 15%. At first glance, X seems better, but if X took 5 years to earn 25%, and Y only 1 year to earn 15%, which is more cost-effective? Clearly Y. That’s why annualized ROI is essential for comparison.

2. High ROI ≠ Low Risk

ROI and risk are closely linked. Investment A has a higher ROI than B, but A’s volatility is also greater. You might face significant losses in the first year and panic sell. Focusing only on ROI without considering risk is the fastest way to incur losses.

3. Hidden costs inflate ROI artificially

When evaluating real estate investments, don’t just look at property appreciation. Mortgage interest, property taxes, insurance, maintenance—all must be deducted from ROI. Omitting any of these will give an inflated ROI figure.

4. Only considering financial returns, ignoring other value

ROI only measures money, not other benefits. For example, investing in a social welfare project might have low financial ROI but high social impact. In such cases, people use SROI (Social Return on Investment) to evaluate.

Summary

ROI is a core tool for investment decisions but not the only one. The most scientific approach is: look at ROI to identify profit potential, consider volatility to assess risk, and evaluate valuation to determine entry timing. Combining these three dimensions enables more rational investment choices.