Many traders buy/sell various assets every day but few of them have an idea of how to estimate correctly the quality of their investments.

Professional traders quite often use ROI (Return On Investment) — an index that helps to assess how fully your investments have paid back, which, in the end, will allow the investor to make money in the long run. Also, ROI is used for efficient investments not only in business but in any financial assets. Mathematically, ROI is the relation of the net profit to the investment.

What is the ROI needed for?

Talking about real business, this index helps to estimate your investments in the long run. And if the trader or investor wants to sell the profit from selling the securities, ROI helps to compare different companies and see which stocks will be more profitable.

Thus an investor can compose their portfolio of the most stable companies, regardless of market fluctuations. To estimate investments in stocks, we can take any security and see on its example, what ROI we will get.

An example of ROI for Amazon

For example, at the beginning of the current year, one stock of Amazon cost 1,840 USD. We buy one — this is the size of our investment.

ROI - Amazon stock price

In November 2020, the stocks are sold for 3,310 USD each. Thus, by buying a stock in January 2020 and selling it in November of the same year, we earn 1,470 USD of net profit. Let us calculate ROI: divide 1,470 by the sum of your investment (1,840) and multiply by 100%.

$1470/$1840*100%=79%

Here we need to realize that if your ROI is larger than the interest on a bank deposit, you can be confident investing in this company — provided that the stock price of the company will keep growing, and the company will pay dividends.

However, if ROI drops lower than the interest on a bank deposit, try to avoid such investments. This might mean a deep market decline.

In our example, thanks to the growth of the stock price, ROI turned out to be extremely high. Of course, we must realize that the market may correct, and the index will in reality be lower.

What ROI value is considered optimal?

As for real business, an ROI value above 10% is considered optimal here. If the ROI is below this level, then consider investing in a simple bank deposit.

In the currency, stock, or oil market, the ROI may even be negative. Moreover, plenty of experienced investors are ready to spend their money on underpriced assets.

As a trading idea or an example, consider Brent oil. The oil market is quite prone to steep declines, and the instrument often spends a long while in downtrends. Try studying the lowest negative ROI that can be seen at those times and buying only with the ROI that low. This way, we will follow the instructions of the great Warren Buffett who taught us to buy assets at their bottoms rather than tops.

For example, since the beginning of the year, oil has fallen from 71 to 16 USD per barrel, which means the ROI would be -77%. If we had bought oil at its top, we could sell it at a much lower price several months later, which is totally unprofitable.

ROI - Brent price chart

On the other hand, such a situation can be interpreted as a good signal to buy the asset which has lost a lot. Then exit the market when the ROI reached 50%. However, an experienced trader can estimate the situation without additional calculations.

The main advantages of ROI

First of all, we can say that the calculation is simple. Investments in a company or the profitability of the stocks of several companies can be compared quickly and easily. Thus you will be able to spread your investments evenly.

We can say that ROI is the best solution for a quick assessment of a business or a company on the whole.

Next, the analysis of history. We can fast and easily estimate the correctness of one's investments.

The main drawbacks of ROI

ROI does not account for the time factor, i.e. it is not quite clear which period you should calculate the index for, and how much your results will depend on this.

For example, ROI may be good for several years but poor for the period from the beginning of the year. This is for the investor to decide and account for various time data. It might be useful to make your own research and single out your preferred time factors.

We never account for all the data and expenses. As a rule, you are not always able to collect all the necessary digits in a large company. On the other hand, in the stock market, expenses can include various commission fees or the difference between buying and selling prices. Many investors note that this index will be absolutely useless for complicated markets.

Unfortunately, we do not calculate the potential profit but get a value for a certain period. It would be interesting to find the perspective of a couple of upcoming years to see the ROI level of these or those periods.

Bottom line

Some consider the ROI to be a popular coefficient these days, loved dearly by marketers. As for its use in any financial market, it can be helpful in all sorts of checkups and research.

Like in the example with Brent, the ROI can signal to buy, showing a market decline and pushing to open long positions. On the other hand, we can simply assess the size of the decline and find maximal drawdowns that will hint at an upward reversal as well.

All in all, the ROI can give you ideas for enhancing your trading efficacy, like any other instrument. However, it will be more useful for those investors who simply assess the profitability of their investments.


Material is prepared by

Financial analyst and successful trader; in his practice, prefers highly volatile instruments. Delivers daily webinars on trading and designs RoboForex educational materials.