Return On Investment for Dummies

Return On Investment (ROI) is a term that is often used when talking about money and investments. Now, I know that talking about money can sometimes be a bit confusing, but don't worry, I'm here to make it as easy as possible for you to understand. So, let's imagine that you have some money saved up, and you decide to invest it in something, like buying shares in a company or starting your own small business.

When you invest your money, you hope that it will grow or make more money for you in the future, right? Well, that's where Return On Investment comes in. ROI is basically a way for people to measure how well their investments are doing. It helps them see if they are making a profit or if they are losing money.

Imagine you start a lemonade stand. You borrow some money from your parents to buy lemons, cups, and other things you need to make lemonade. After you sell your lemonade, you count all the money you made. Subtracting the money you borrowed to buy your supplies, you can figure out how much profit you made. The percentage of profit you made is called the Return On Investment. It tells you how much money you made compared to the money you put into your lemonade stand.

Let's say you made $100 selling lemonade, and you borrowed $50 from your parents. Well, if you subtract the $50 from the $100, you have $50 left. That's your profit. Now, to calculate the Return On Investment, we need to find the percentage of the profit compared to the money you invested. In this case, your investment was $50, so we divide the profit by the investment and multiply by 100: 50 divided by 50 is 1, and then multiplied by 100 is 100. So, your Return On Investment is 100%. That means you doubled the money you invested!

But what if you didn't make any profit? Let's say you made $30 selling lemonade, but you still borrowed $50 from your parents. Well, if you subtract the $50 from the $30, you have -$20, which means you lost money. Now, let's calculate the Return On Investment. We divide the profit by the investment and multiply by 100: -20 divided by 50 is -0.4, and then multiplied by 100 is -40. So, in this case, your Return On Investment is -40%. That means you lost 40% of the money you invested.

So, to sum it all up, Return On Investment is a way to measure how well an investment is doing by comparing the profit or loss made to the amount of money invested. A positive ROI means you made a profit, while a negative ROI means you lost money. It helps people decide if their investment is a good one and if they should continue doing it or maybe try something else.

Now, I hope that makes sense to you. It's really just a way to see if you're making money or losing money on your investments. So, the next time you hear someone talking about Return On Investment, you'll know exactly what it means!