TeenBusiness.com > Teenvestors > Business Concepts > Return on Investment (ROI)

A return is the amount of money you make on an investment expressed as a percentage of your initial investment. You can think of interest as the return on money you lend to a bank (such as your bank deposits) or to corporations (such as when you buy a corporate bond). Return is a broad term for how much money you earn on an investment since not all investments earn interest. For example, stocks don’t earn interest, so the return on stocks will be calculated based on the profit you can make on the investment if you sold it. To be more specific, suppose you buy General Electric stock for $25 and it goes to $30 one year later, your return is calculated as follows:

Return = (Ending Value – Beginning Value) / Beginning Value

Return = ($30 - $25)*100/$25 = 20% Return

The return described above is calculated on an annual basis. In other words, the return is 20% per year. If your calculation period is shorter than a year, you would have to annualize the returnt. For example, suppose the General Electric stock went from $25 to $30 over a 6-month period instead of over a 1-year period. You would have to double the percentage you calculate to adjust for the fact that the $5 increase happened over a 6-month period. The calculation would be as follows:

Return = 2*($30 - $25)*100/$25 = 40% Return

Another way to think about this is that if you had a $5 increase of the General Electric stock price over a over a 6-month period, you would have a $10 increase over a 1-year period. Therefore the return calculation would be as follows:

Return = ($10)*100/$25 = 40% Return