What Is Return On Investment?
Return on investment (ROI) is a term used in the financial industry to describe the monetary gain made by investing in some type of financial vehicle. There are a variety of financial vehicles that can be used to gain a reasonable return on investment. Stocks and bonds are typically what are thought of when considering investing; however, other vehicles, such as small business loans, precious metals, and credit transactions, can also provide reasonable rates of return on investment. An investor simply needs to understand how to calculate and monitor his or her investment and return rates.
Typically, return on investment is determined by dividing the amount of financial return from a specific investment vehicle by the total amount of monetary backing provided initially. For example, if an investor invested $20 US Dollars (USD) and got a return of $15 USD, then he or she would divide 15 by 20 to get 0.75 or a 75% rate of return. The higher the rate of return, the greater amount of money an investor is receiving as either dividend returns or cash returns.
Dividend returns are a specific type of ROI that entail all investors getting a guaranteed return on investment based on the success of the company and regardless of investment amount. As an example, a particular company may have a very successful year, and thus wants to extend dividend offerings of 1% of 10% of all profits to each investor. Therefore, each investor receives the same amount of return for investing in the company.
Cash returns are similar to dividend returns; however, each investor gets a different rate of return based on the amount of investment, also known as shares, they provided. For instance, if a share of a particular company is valued at $5 USD on the open market, and an investor purchases 100 shares at $500 USD but two weeks later the shares are worth $600 USD, that particular investor has a rate of return of 20% and a cash return of $100 USD. An investor who only purchased $100 USD worth of stock, however, will still get a 20% return, but only gain $20 USD cash return.
Written by Nathaniel P. Miller
