How to interpret stock investment returns? The complete guide to ROI calculation and practical applications

The Essence of Investment Return Rate

The investment return rate (Return on Investment, abbreviated ROI) is a key financial indicator measuring investment efficiency, usually expressed as a percentage. It reflects how much profit can be generated from invested capital and is widely used in personal financial planning, corporate performance evaluation, and project investment comparisons.

In simple terms, the investment return rate is the ratio of net profit to invested funds. Net profit = Investment income - Investment costs. This concept seems straightforward, but actual calculations require accounting for all relevant costs.

The Calculation Logic and Formula of ROI

Basic formula: ROI = (Net Profit / Total Investment) × 100%

For example, in stock investment, suppose you buy 1,000 shares at $10 each, sell them after a year at $12.5, receive $500 in dividends, and pay $125 in transaction fees.

Calculation steps:

• Total income = (12.5 × 1000) + 500 = $13,000
• Total costs = (10 × 1000) + 125 = $10,125
• Net profit/loss = 13,000 - 10,125 = $2,875
• Stock investment return rate = (2,875 / 10,000) × 100% = 28.75%

This example reveals an important principle: When calculating stock investment returns, both capital gains and dividend income, as well as all transaction costs, must be considered.

Application of ROI in Different Fields

E-commerce and Advertising ROI

In e-commerce operations, ROI calculation emphasizes cost-effectiveness:

Formula: ROI = (Sales Revenue - Product Cost) / Product Cost × 100%

Example: Product cost $100, selling price $300, 10 units sold through advertising, with $500 advertising expenses.

ROI = [(300 × 10) - (100 × 10 + 500)] / ((100 × 10 + 500)) × 100% = 100%

Note that industry practitioners sometimes refer to “ROI,” which actually means ROAS (Return on Advertising Spend).

ROAS and ROI Core Difference

ROAS = Revenue generated from traffic / Cost of traffic acquisition

Using the above example: ROAS = (300 × 10) / 500 × 100% = 600%

The fundamental difference: ROI measures profit, ROAS measures revenue; ROI includes all costs, ROAS only accounts for advertising expenses.

ROI Analysis Over Time — Annualized Return Rate

ROI figures for different investment periods are not directly comparable, so the concept of annualized investment return is introduced.

Annualized return formula: ((1 + Total Return))^((1 / Years)) - 1 × 100%

Comparing two schemes:

• Scheme A: 2-year total return 100% → Annualized return = ((1+1))^((1/2)) - 1 = 41.4%
• Scheme B: 4-year total return 200% → Annualized return = ((1+2))^((1/4)) - 1 = 31.6%

Clearly, Scheme A is better because of a higher annualized return.

Differentiating ROI, ROA, and ROE

For corporate financial analysis, three concepts need to be distinguished:

Example: A company with assets of $1 million (of which $0.5 million is debt, $0.5 million equity), invests in a project costing $100,000, which ultimately earns $200,000 profit.

• ROI of the project = ((200,000 - 100,000) / 100,000) = 100%
• The company’s annual profit = $1.5 million, ROA = 150 / 100 = 150%
• ROE = 150 / 50 = 300%

Practical Strategies to Improve Stock Investment Return Rate

Direct Approach: Choose better investment targets

Based on risk-return characteristics, the ROI ranking generally is: Crypto and Forex > Stocks > Indexes and Funds > Bonds

High ROI comes with high risk, so other indicators should be used for assessment:

• Compare volatility: If a stock’s volatility ratio to the index is 7:3, adjust position sizes to 3:7 to balance risk and return
• Evaluate valuation: An index with PE percentile at 50% has lower risk than one at 70%, with potentially higher returns

Indirect Approach: Cost management and portfolio optimization

According to the ROI formula = Profit / Investment, ways to improve ROI include:

• Increase profit: Choose high-dividend stocks
• Reduce costs: Select low-commission brokers, lower trading frequency

Overview of High-ROI Investment Tools

1. CFD Contracts for Difference Trading

CFDs feature low margin requirements and high leverage. For stocks, only 20% margin may be needed. If $10,000 capital yields a $500 profit, ROI can reach 25%, which is quite attractive.

2. Forex Margin Trading

The forex market has the largest global trading volume, with sometimes over 30% returns. 24-hour trading offers high flexibility. However, influenced by international factors, it requires substantial experience and risk management; setting stop-loss and take-profit orders is recommended to protect gains.

3. Gold Investment

Gold combines value preservation and appreciation. In 2019, international gold prices increased by 18.4%, reaching an 8-year high. During economic volatility, gold is an important hedging tool.

4. Stock Market Investment

For example, US stocks have an average annual return of over 12% over nearly 200 years. Due to low valuation, high dividends, and policy support, it remains a relatively mature and stable choice.

Limitations and Precautions When Using ROI

Ignoring Time Factors

Comparing two investments solely based on ROI can be misleading. Project X with 25% ROI over 5 years is different from Project Y with 15% ROI over 1 year. Using annualized ROI for comparison yields correct conclusions.

Asymmetry of Risk and Return

High ROI often accompanies high volatility. An investment with high ROI but significant fluctuations may cause investors to panic and close early at losses, contrary to expectations. Therefore, simultaneous assessment of volatility and other risk indicators is essential.

Cost Omissions in ROI Calculation

In real estate investments, excluding mortgage interest, property taxes, insurance, maintenance, etc., can lead to an overestimation of ROI. Complete cost accounting is a prerequisite for accurate calculation.

Ignoring Non-Financial Benefits

ROI only measures financial returns and neglects social or environmental benefits, potentially undervaluing the true worth of a project. For such cases, emerging indicators like “Social Return on Investment” have been developed for supplementary evaluation.

Investment decisions should consider multiple indicators. Stock investment return rate is just one aspect. Understanding the calculation principles and limitations of ROI, combined with risk assessment, time horizon, and cost control, enables more informed investment choices.