Understanding the Importance of Knowing your ROI in Stock Investing

Investing in the stock market can be a great way to enhance the value of your personal net worth. If you are unlucky or just not a very good investor, you can also lose money. Professional and casual investors alike need to have a way to measure the performance of their portfolio and assess the risk to reward ratio. Knowing your Return on Investment (ROI) is one way to measure the performance of your investments.

The ROI is a simple calculation expressed in percentage form. You need several pieces of information to calculate your ROI. You need the total dollar amount you spent, including any commissions when you bought the stock and the total amount you received less any commissions when you sold the stock. For simplicity’s sake, we will assume you sold it after 1 year and we don’t have to worry about calculating an annualized return for a stock held more or less than 1 year.

FORMULA

The Amount You Received When you Sold the Stock minus The Amount it Cost to Buy the Stock divided by the Amount it Cost to Buy the Stock.

To illustrate, following is an example. Suppose you paid $1,500 to purchase 100 shares of stock and paid a $12 commission. Your total cost basis would be $1,512. If you sold it exactly 1 year later for $2,200 less the $12 commission, you would receive $2,188. or a gross profit of $676 ($2,188-$1512). Your ROI would be 44.7% ($676/$1512).

Some less sophisticated investigators may get a little confused by using the ROI calculation and simply measure their stock’s performance in terms of total dollars. That is not a true representation of how well you did. If you invested $5,000 and made a $1000 profit, you are doing better than if you invested $10,000 and made the same $1,000 profit. Theoretically, had you doubled your $5,000 investment, you would have made a $2,000 profit.

The key point to remember when investing is that you should measure the performance of your stock portfolio or individual stock in terms of a percentage gain and not a dollar gain. While it may be nice to make a $1,000 on any investment, the more you need to invest to make that $1,000, the more risk you assume.
Remember that you can always lose money on an investment. The higher your ROI, the greater the stock has appreciated.

Return on Investment is the best way to judge how well your stock or stocks have performed.