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If you’re new to the investment world, the return on investment (ROI) calculator can be a helpful tool. ROI is the ratio of the difference between the initial amount invested in a particular financial instrument and the amount earned from it. This is an important way to determine how well that investment has paid off over time.
To simplify the process of calculating this ratio, we can use the ROI Calculator. This tool helps you see exactly how well a particular investment is performing over time. Before we get started, let’s take a closer look at exactly what the ROI calculator does and how to use it.
Before getting into how to use the basic ROI calculator, it’s important to understand the information it can provide. As mentioned earlier, ROI includes formulas that determine the profitability of a particular investment. It works by calculating a percentage that reflects how much your original investment has grown.
For example, let’s say you invested $100 in stocks. At the end of the year, we found that our investment had increased to $120. His ROI in this case will be 20%.
If your investment returns poorly, your ROI can also be negative. Imagine the same $100 investment has dropped in value and now he is only worth $80. In this case the ROI would be -20%, meaning a loss of investment.
Why Use the Basic ROI Calculator
As you can imagine, being able to calculate your return on investment is an important part of making sure your money is working in your favor and not against you. Some investors prefer to cut their losses if the price falls below a certain value. For example, legendary investor William O’Neill recommends selling stocks that generate his negative ROI of -7% to -8%.
This not only prevents your losses from becoming too large, but also reduces your opportunity costs. Opportunity cost is the money lost by keeping money in a loss-making investment if a better alternative were available.
Understanding ROI also helps you decide on an investment exit plan by allowing you to set goals. Some investors will cash in on their investment when they get his ROI of 20% or 25%. But again, this depends on your investment and your individual investment style.
How the ROI calculator works
An effective basic ROI calculator requires very little information and is easy to use. Technically speaking, there are a variety of ROI calculators available, some using formulas that are much more complex than others.
Some calculators take into account all sorts of different information, from dividends to inflation rates. Businesses can even use his advanced ROI calculator to predict how an investment is likely to perform in the future.
However, if you’re looking for an easy way to measure how your investment is performing, a calculator using this simple ROI formula should do just fine.
- ROI = (net profit/initial investment) x 100
Net profit refers to the difference between the amount originally invested and the current amount.
What information do I need to use the basic ROI calculator?
As you can see, creating a basic ROI template is fairly easy given the following information about your investment:
- how much you invested
- how much money do you have now
This is the only good ROI calculator you need to calculate a basic ROI in seconds. Let’s look at an example to explain what it means.
Suppose you initially invested $100 to buy a stock. After a year, your investment has increased to $150.
To calculate the ROI, the ROI calculator subtracts the original investment amount from the current value: $150-100 = $50. This shows that the net return on this investment is now $50.
The calculator then divides the net profit by the initial investment: $50/$100 = 0.5. Last but not least, multiply by 0.5 x 100 to reveal a 50% ROI.
Annual return and ROI
The example above was very simple, but you can also analyze annualized rates of return when it comes to long-term investments. This helps determine the average ROI an investment is earning in a given year.
While it may be tempting to simply divide the ROI by the number of years invested, calculating the annual rate of return is a bit more complicated. This is especially true for investments such as certificates of deposit (CDs), bonds and mutual funds, all of which rely on the concept of compound interest. Simply put, compound interest increases your initial investment by earning interest. The investment then earns even more interest on the interest already earned.
For example, let’s say you deposit $100 at an annual interest rate of 5%. At the end of her first year she earned $5, for a new total of $105. At the end of Year 2, you have earned 5% of $105, making a profit of $5.25 and a new total of $110.25.
Calculating annual returns using the ROI Calculator
The formula is a little more complicated because there are additional considerations in calculating annualized returns.
- Annual Return = (1 + Return) ^ (1 / N) – 1
N= number of periods you are measuring.
Fortunately, many basic ROI calculators make it easy to circumvent the calculation. Assuming you are making money at a set interest rate, simply enter your initial investment amount, the current value of your investment, and the time period your money is invested. The calculator will work through that equation and give you the average rate of return for the year.
Knowing how to calculate basic ROI will help you with many investments. Whether you want to see the performance of your stock investment or calculate the expected return on your high-yield checking account, the ROI Calculator is a useful tool.
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