Still, the reality in any market is different: to be winners, we need reasonably large baggage of knowledge and especially to choose our assets according to risks, technical analysis, and what we should be left with – or ROI, the return on investment.
What is the ROI?
ROI is the acronym for Return on Investment, which refers to the return on investment we make, which we calculate using a mathematical formula. So, we are talking about a metric that measures the profitability of an investment. Everyone who invests, regardless of the chosen market, does so precisely for earnings or for the returns that the selected assets give. For example, investing in physical real estate is among the least preferred, especially in the medium term, precisely because of a lower ROI than other assets. The calculation formula compares how much we pay for an asset and how much we earn in percentages. The ratio divides the net profit or loss, if applicable, from an investment at its initial cost, so it can be calculated before the investment for an insight into what we will get.
How is this helping me, more precisely?
ROI helps us see if an investment would be profitable, whether or not it is worth doing before entering an asset, but can still be used in specific ways. For example, suppose we have a business and want to improve. In that case, we expect higher profits to cover the improvement and add as much as possible, so we can use this calculation to evaluate any expense and to help investors make decisions about managing their capital.
The Return on Investment must also include risk or uncertainty, so we take a margin of error. For example, if it is an apartment we buy for rent, we calculate ten months in a year instead of 12 if we are left without tenants, depending on this probability. It is vital to maintain that both in business and in personal trading, this ROI is not taken into account alone, but only together with other analyses.
How do we calculate the ROI?
There are several ways in which we can calculate the return and the best-known formula is the net income divided by the total cost of the investment, or R = Net income/investment cost x 100.
Let’s say that for research, trading journals, applications, or whatever we use, we have $5, and after the analysis, we enter a $50 long position. The total cost will be $ 55 and if the asset goes up to $ 200, it generates a net profit of $ 145. 145/55 = 2.63 x 100 = 263%.
Common mistakes when calculating the ROI
All sorts of human mistakes can be made, especially in the sector of more inexperienced entrepreneurs or investors, such as non-compliance with margins of error if we try to estimate – or complete failure to calculate all costs included in the acquisition, progress, or depletion of funds in case of market downturns. And we are not taking such possibilities into account.
For example, an apartment can cost 80,000 euros. To this apartment, we can add up to 15,000 – 20,000 euros for furniture, renovation, notary costs, documents, bank interest in case of credit, etc. Therefore, we cannot calculate an ROI here with 80,000 as the apartment costs and a specific rent because the calculation would be much higher than a tangible ROI. Also, when it comes to long-term investments, the return analysis will have to be done annually, considering the related fees and costs.
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