What is a return?
A return is the sum of money gained or lost on a particular investment compared to the invested amount. It is usually stated as a percentage of the amount invested. For example, a $25 gain on a $100 investment would have a 25 percent return.
A return is synonymous with a profit, yield, capital gain, interest, dividend or revenue produced by an investment. However, it’s important to remember that “return” can refer to the loss on an investment as well.
A return can include changes in value as well as income. Looking at annual return percentages allows someone to compare the performance of various investments that are held for different periods of time.
To be sure, there is an axiom that is followed by many of those investing in something, and that’s is that the greater the risk you take, the greater the possibility for higher returns. That’s not always the case. If an investment gamble tanks, the return is negative.
Generally, return can be measured in three ways: return on investment (ROI), return on equity (ROE) and return on assets (ROA). The way these are calculated is very similar, but the results have different but equally valuable meanings.
ROI is the most common way to look at the amount gained from your investment. The formula used is also the primary way to compute ROE and ROA. You arrive at your ROI by first getting the difference between the loss or gain on the investment, and dividing it by the cost of the investment.
Brian invested $500,000 to buy a plot of land and decided to sell it for $600,000 a year later. His return on investment is 20 percent. He got that percentage by dividing his profit ($100,000), by his original investment ($500,000).