HOW TO CALCULATE
RETURN ON INVESTMENT

Return on Investment – ROI, is one of the most relevant metrics that investors use when evaluating a potential investment.This guide will walk you through everything beginners need to know about ROI, from basic calculations to practical applications in today’s investment landscape.

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Return on investment (ROI) is one of the most fundamental metrics that investors use to evaluate the potential profitability of their investments. Whether you’re considering stocks, property, or bonds, understanding how to calculate and interpret ROI can help you make more informed financial decisions.

But, what does ROI mean and how does it affect the investment decisions you make?

What Is Return on Investment?

Return on investment measures the gain or loss generated on an investment relative to the amount of money invested. It’s expressed as a percentage and provides a straightforward way to compare the efficiency of different investments, regardless of their size or type.

ROI is particularly useful because it gives you a standardised way to assess whether an investment has been worthwhile. For instance, if you’re comparing a stock investment with a property purchase, ROI allows you to see which has performed better relative to the initial capital invested.

The beauty of ROI is its simplicity and versatility. You can apply it to virtually any investment scenario, from buying shares in a health sector company to investing in a buy-to-let property. It’s also sometimes referred to as Rate of Return (ROR), though the terms are essentially interchangeable.

Basic Formula to Calculate Return on Investment

The ROI calculation is relatively straightforward, making it accessible even for beginners. The basic formula is:

ROI = (Investment Gain – Cost of Investment) / Cost of Investment × 100.

Let’s look at a practical UK example. Suppose you purchase a property in Manchester for £250,000 and sell it three years later for £300,000. Your ROI calculation would be:

• Investment gain: £300,000 – £250,000 = £50,000
• ROI: £50,000 / £250,000 × 100 = 20%

For stock investments, the principle remains the same. If you invest £1,000 in shares and later sell them for £1,250, your ROI would be:

• Investment gain: £1,250 – £1,000 = £250
• ROI: £250 / £1,000 × 100 = 25%

It’s important to note that ROI can also be negative. If you bought shares for £2,000 and had to sell them for £1,800 due to market conditions, your ROI would be:

• Investment gain: £1,800 – £2,000 = -£200
• ROI: -£200 / £2,000 × 100 = -10%

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

What is a Good Return on Investment?

Determining what constitutes a “good” ROI depends on several factors, including your financial goals, risk tolerance, and the current economic environment.

Your Financial Needs and Life Stage

Your definition of a good ROI will vary depending on where you are in life. A young professional just starting their investment journey might be comfortable with higher-risk investments that promise greater returns. In contrast, someone approaching retirement might prioritise preserving capital over maximising returns.

Risk Level Considerations

The relationship between risk and return is fundamental to investing. Generally, investments with higher potential returns come with increased risk. UK government bonds typically offer modest returns but are considered very safe. On the other hand, investing in individual stocks or emerging markets can offer higher potential returns but with greater volatility.

Risk and Returns on eToro

When building an investment, understanding the relationship between risk and potential returns is crucial. eToro provides several tools to help investors assess and manage this balance effectively.

Risk Score and CopyTrader

eToro’s risk score is a valuable feature that rates Popular Investors on a scale of 1-10, with higher numbers indicating greater risk. This tool becomes particularly useful when using the CopyTrader feature, allowing you to see both the monthly and yearly returns achieved by successful traders alongside their risk profiles.

Before copying any trader, you can examine their profit and loss (P&L) statistics, which show the average profit or loss on their trades. This transparency helps you make informed decisions about whether a particular trading strategy aligns with your risk tolerance and return expectations.

Understanding Fees and Their Impact on ROI

Investment fees can significantly impact your overall returns. eToro’s fee structure is transparent, covering spreads, overnight fees for leveraged positions, and withdrawal fees. These costs eat into your net returns, so knowing them helps you calculate your true ROI.

Dividends on eToro

represent an important component of total investment returns that beginners often overlook when calculating ROI.

Types of Dividend-Paying Assets on eToro

Several investment types on eToro can generate dividend income:

• Dividend stocks: Companies like those in the FTSE 100 often pay regular dividends
• ETFs: Many exchange-traded funds distribute dividends from their underlying holdings

How and when you are paid your dividend on eToro will be determined by whether you hold the position as a “traditional” stock position or as a CFD (Contract for Difference).

Stocks & ETFs

• Payment Timing: Dividends for real assets are credited to your “Available Balance” on the official payment date set by the company.
• Eligibility Rule: To receive the dividend, you must hold the position at the market close on the trading day before the .

While the number of days it takes to settle a trade varies across markets, eToro’s specific requirement is that you own the asset when the market closes the day before it goes “ex-dividend.”

CFDs

• Payment Timing: If you hold a Buy (Long) CFD position, the dividend payment is credited to your available balance on the ex-dividend date itself.
• Short Positions: If you are short selling a stock using a CFD, the equivalent dividend amount will be deducted from your balance on the ex-dividend date as you “manufacture” a dividend to be credited to the loaner of the stock.
• Eligibility Rule: You must hold the CFD position before the market opens on the ex-dividend date.

To check your ROI:

1. Navigate to your Portfolio
2. Click My Portfolio icon.
3. Select Portfolio History.
4. Select the required date range found in the top right hand corner of the screen.
5. The screen will show rows breaking down Net Cash Flows, Dividends, and Total Fees over the period.
6. The percentage return on positions will be displayed with there being an option to include additional filters using the menus found in the top right hand corner of the screen.

Tax Considerations

UK investors should be aware that dividends may be subject to tax depending on your total dividend income and tax bracket. The first £500 of dividend income (2025/26 tax year) is tax-free for most investors, with rates of 8.75%, 33.75%, or 39.35% applying above this allowance depending on your income tax band.

Tax treatment differs across jurisdictions.

Limitations of the Basic ROI Formula

While ROI is a powerful metric, it has several limitations that investors should know.

The basic ROI formula doesn’t account for how long you’ve held an investment. A 50% return over ten years is very different from a 50% return over two years. This limitation makes it difficult to compare investments held for different periods.

Inflation Impact Ignored

ROI calculations typically don’t adjust for inflation. In an environment where inflation has been elevated, a 5% nominal return might actually represent a loss in real purchasing power.

Hidden Costs

The simple ROI formula may not capture all investment costs, including:

• Transaction fees and commissions
• Ongoing management fees for funds
• Tax implications
• Property maintenance costs (for real estate investments)

Risk Not Reflected

A 10% return from a government bond and a 10% return from a speculative stock investment appear identical in basic ROI calculations, despite vastly different risk profiles.

Financials Only

The ROI figure looks purely at financial gains and doesn’t let us understand other benefits such as social or environmental factors.

Other Alternatives to the ROI Formula

For more sophisticated analysis, investors can use alternative metrics that address some of ROI’s limitations:

Annualised ROI

This metric converts returns to an annual basis, making it easier to compare investments held for different periods. The formula is: Annualised ROI = [(1 + ROI)^(1/years)] – 1.

Real Rate of Return

This adjusts nominal returns for inflation, providing a clearer picture of actual purchasing power gains: Real Return = [(1 + Nominal Return) / (1 + Inflation Rate)] – 1.

Internal Rate of Return (IRR)

IRR is particularly useful for investments with multiple over time, such as rental properties or dividend-paying stocks. It represents the discount rate that makes the net present value of all cash flows equal to zero.

Return on Equity (ROE)

For stock investors, ROE measures a company’s profitability relative to shareholders’ equity. It’s calculated as: ROE = Net Income / Shareholders’ Equity.

A company with an ROE above 15% is generally considered to be performing well, though this varies by industry.

Final thoughts

ROI is a fundamental metric that helps investors evaluate and compare investment opportunities, but it should be used alongside other factors like risk, time horizon, and personal financial goals.

Understanding ROI is just the beginning. The key to successful investing is applying this knowledge consistently while considering other factors which might help you make an investment decision which is right for you.

Visit the eToro Academy and practise applying ROI to real assets.

Frequently Asked Questions

Can ROI be used to compare different types of investments?

Yes, ROI provides a standardised way to compare all types of investments. However, for more accurate comparisons, especially between investments held for different time periods, consider using annualised ROI. This gives you a better idea of portfolio performance across different asset classes and timeframes.

How does compound interest affect ROI calculations?

Compound interest can significantly impact long-term returns but isn’t reflected in basic ROI calculations. For investments where returns are reinvested, such as accumulating funds or dividend reinvestment plans, the actual return will be higher than simple ROI suggests due to the compounding effect.

Should I include dividends when calculating stock ROI?

Absolutely. Dividends are a crucial component of total return. To calculate total ROI for stocks, add all dividends received to your capital gain (or loss) before dividing by your initial investment. This gives you a complete picture of your investment’s performance.

How often should I calculate ROI on my investments?

While you can calculate ROI at any time, it’s most meaningful for completed investments or at regular intervals (annually, for instance). For long-term investments, frequent ROI calculations may lead to overreacting to short-term market fluctuations.

What’s the difference between gross and net ROI?

Gross ROI uses the basic formula without considering costs like fees, taxes, or expenses. Net ROI subtracts all these costs from your gains before calculating the return. Net ROI provides a more accurate picture of your actual investment performance.