Average Return on Investment, also known as rate of return, rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. It is usually expressed as a percentage rather than a fraction. It is derived by combining some bigger numbers and some smaller numbers, some years better than the average and some worse than average years. This is how averages work.
It measures the cash generated by or lost due to the investment. It measures the cash flow or income streaming to the investor from an investment, in relation to the amount invested. The Cash flow can be in the form of profit, interest, dividends, or capital gain/loss. Capital gain/loss occurs when the market value or resale value of the investment increases or decreases respectively.
Any investment carries significant risk, the investor will lose some or all of the invested capital or even gain. For example, investments in company stock shares put capital at risk; the capital value (price) of a stock share constantly changes. Since all stock shares have some changes in price with time, the changes in price directly affects Average Return on Investment for stock investments.
It should be noted that this investment is a measure of profitability and not a measure of size. In general, the higher the investment risk, the greater the potential investment return, and the greater the potential investment loss. Financial experts advise customers to just hang in there through the bad times, taking advantage of the drop in your fund's share price to buy more at bargain prices. Switching from one fund to another in Average Return on Investment can sometimes be a big mistake.
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