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What Is Return on Investment?

Return on investment (ROI) is a financial term used to refer to the ratio of the money that is gained (or lost) to the money that has been invested. This figure is usually expressed as a percentage. When an individual or an organization invests money on something, a positive return on investment is always desired.

How is the return on investment calculated? Let us say that you invest $100 and get $60 as the return. If you divide 60 by 100, you will get 0.6. You then simply have to multiply this by 100 to get the return on investment - 60%. Quite obviously, the higher the return on investment, the more desirable it is for the investor.

One expects a return on investment on practically all kinds of business endeavors. For example, if an individual invests on mutual funds, at the end of the financial year, he expects to have more money than he spent on the mutual funds. The return on investment is the money that he has gained within that period. Another example would be people buying stock at a company. Some companies would offer dividends on their stocks at the end of the financial year. The dividend that is paid out to the stock holders is a form of a return on investment. The amount will depend on how the company performed within the period, but in general, dividends involve giving out the same amount to investors, regardless of the amount of stock they hold. On the other hand, cash returns will depend on the amount of stock that one holds. The more stock that one owns, the more cash he receives even if the return on investment (the percentage) is the same figure for the whole company.

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