What is ROI?
ROI stands for “return on investment.” It’s a measure of how successful investment has been in generating profits. In other words, it tells you how much money you’ve made from the money you’ve put in.
ROI is usually expressed as a percentage. So, for example, if you invest $10,000 and make $15,000 over the same period, your ROI is 150%.
How to calculate ROI?
There are different ways to calculate ROI depending on the type of investment you’re looking at. But here we’ll look at one straightforward way:
ROI = Gain from investment / (cost of investment) * 100
So, continuing on the example above:
150% = $15,000 / $10,000 * 100
ROI = 1.5= 150%
Why does ROI matter?
It’s important to know your ROI because it could help you decide whether or not to invest. For example, suppose you know that ROI for one type of business is generally around 30%, and another is usually between 100% and 1000%. In that case, you’ll be able to tell which is likely to bring in more money for your initial outlay. This can help you decide whether to put your money into the business that seems likely to give a more significant return or spread it around a bit more.
What Is a good ROI?
So what’s a good ROI? Of course, this depends on the investment. But, as a general rule, anything over 10% is considered good, and over 20% is excellent.
However, it also depends on the amount of risk you’re taking. If you’re investing in something that’s a high risk, then the percentage may seem low – for example, if you put $100 into a company and it has a 10% ROI, that means you get $10 back. But if the company goes bust, you lose your money completely. And when that’s a real possibility, a 10% return may seem inadequate.
But if you’re putting money into something low risk – say a conventional bank paying 3% interest – then that’s an excellent rate of return. In other words, it doesn’t matter what the percentage is: If the ROI is good for one investment, it will be suitable for another.
The best ways to increase your ROI
Now that you know what ROI is and how to calculate it, you’re probably wondering how you can increase your own ROI.
There are a few things you can do:
1. Invest in something with a high ROI: This may seem obvious, but if you want to make more money, invest in something that already has a good return on investment.
2. Decrease your costs: This is another obvious one, but if you can find ways to decrease the amount you’re spending, you’ll be able to increase your profits.
3. Increase your income: Finally, the best way to increase your ROI is to increase the amount of money you’re making. This may involve finding new customers or clients or simply finding ways to make more money from your current customer base.
A few things that can decrease your ROI
There are also, of course, a few things that can hurt your ROI. Here are a few things that can have a negative impact:
1. Investing in something with a low ROI: If the investment doesn’t have a good return, you will not make much money from it.
2. Increased costs: If your prices go up, it will be harder for you to make a profit.
3. Decreased income: If you can’t find new customers or clients or don’t have any luck with your existing clients, you won’t be able to increase the money you’re making.
Investing in stocks is most likely to give you an ROI that’s over 20%.
On the other hand, short-term investments like CDs are usually less than 5%.
Knowing your ROI is essential, whether you’re looking to invest in a new business or are simply curious about the performance of an existing one. By understanding what ROI is and how to calculate it, you can make better-informed decisions about where to put your money – and hopefully see a good return on investment.