Rate of returns are commonly referred to as RoR, or simply just returns. The RoR represents the net gain or loss of an investment after factoring in the original investment amount. It is very useful for making educated investment decisions.
Typically RoR’s are calculated as a yearly percentage although they can be adapted for any timeframe. When calculated yearly, a rate of return can be referred to as an annualized return.
Rate of returns is used across the world of investment including stocks, bonds, gold, and real estate investments. It is used to compare an investment’s yearly performance in comparison to previous years or in comparison to other investments.
It is easily calculated by subtracting the initial cost of an investment from its current value, and later dividing it by the initial value. Afterward, you multiply the result by 100 to reach a percentage.
Rate of return % = [(Current Value – Initial Value) / Initial Value] x 100
For example: Let’s say that you purchased a home in a very hot real estate market for $200,000. By the end of the year, the house has been appraised for $250,000. The rate of return for the property would be 25% for that year.
Usually, the most attractive types of investments are those with high historic rates of return.
Cases of a loss instead of a profit are considered a negative return. Other factors which may affect an investment such as inflation are not considered when calculating the rate of return.