Return on Investment Definition

Any investment either loses or makes money; the change in principal value is termed the return on investment. If the investment loses money, the return on investment will be negative while if the investment makes money the return will be positive. The return on investment is usually calculated as the ratio of money made or lost to the amount of money invested and is usually presented as a percentage. The change in value variably is called the interest, the profit or loss, the gain or loss, or the net income or loss. The sum invested variably is called the asset, the capital, the principal, or the cost basis.

Note that the return on investment percentage does not indicate the duration of the investment, although in practice the return on investment is usually annualized. For example, if you invested $100 at the beginning of the year and were able to withdraw $105 at the end of the year, your return on investment would be 5%.