How to calculate an investment rate of return will be the focus of this post, but first, what is rate of return and how is it used in today’s business decision making?
WHAT IS AN INVESTMENT RATE OF RETURN?
Rate of return is the sum received after the cost of an initial investment. It is calculated in percentage based on the value of the capital. To put it in a more relatable form, it is the gain or profit made by a business after the capital has been recovered and set aside. Just like in every business, there is also a possibility to make losses just as there is for profits. When the percentage of the value of the rate of return of an investment is expressed in a negative value, it loss; if it is positive, it means gain.
CALCULATING THE RATE OF RETURN OF AN INVESTMENT
As is usually the case in this present world, there is always a programmed machine somewhere that can be used to carry out this sort of calculations. But it will not hurt to have a fundamental idea of what goes on in that machine because, who knows when the need may arise.
The two values needed to perform this calculation are
- Current value of the investment; that is the price at which it was acquired
- Original value of the investment; that is what it is worth at the moment
This should come as no surprise to anyone that the current value and original value of an investment are not the same. Many things, including fluctuation contributes to that.
((Current value – Original value) / Original value) X 100
THE BENEFITS OF CALCULATING AN INVESTMENT RATE OF RETURN
The very first benefit a business organization stands to gain from finding the rate of return of their investment is that is shows upfront if an investment was a good one or a bad one. Other benefits include
1. It provides important investment information. If from the calculations, one gets to find out that it was a good investment, it means it is a fertile opportunity for more investment of that sort. If it is a bad one, the investor should know better than to want to put more money into that kind of venture.
2. It rates the investor’s decision making skills when it comes to what investment to make. If one keeps continually make investments at a loss, then there is definitely wrong with the investment strategy being implemented.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.