Learning the friendly way

Currency strength shapes global trade, investment flows, and your real-world spending power. But strength isn’t just about flashy exchange rates. It’s backed by low inflation, investor trust, and governments that don’t spontaneously combust.

In this guide, we break down the top 10 strongest currencies in the world for 2025. You'll learn what drives their dominance, why some currencies outperform others, and what this means for markets, businesses, and travellers alike.

Spoiler: it's not always the ones you expect.

Before we begin: Currency strength is measured by exchange rate value against major currencies like the USD and GBP, combined with factors including economic stability, inflation rates, trade balances, and investor demand. 

The strongest currencies typically emerge from countries with sound fiscal policies, political stability, strong export economies, and substantial foreign reserves.

Top 10 strongest currencies in the world (2025 ranking)

The following currencies dominate global markets by exchange rate value against the USD and GBP. These rankings reflect the current market conditions at the time of writing.

1. Kuwaiti Dinar (KWD)

Exchange Rate: 1 KWD = 3.25 USD | 2.44 GBP

The Kuwaiti Dinar isn’t just strong - it’s consistently the world’s strongest. Fueled by vast oil reserves and a government that actually knows how to manage money, Kuwait punches well above its weight. A small population + massive petroleum wealth = eye-watering per capita income, and a currency that commands global respect.

Back in 2007, Kuwait ditched its US dollar peg for a currency basket, a bold move that gave it more control and resilience. Add in one of the largest sovereign wealth funds on the planet and a no-nonsense approach to spending oil money, and you’ve got a textbook case in currency strength.

2. Bahraini Dinar (BHD)

Exchange Rate: 1 BHD = 2.65 USD | 2.05 GBP

The Bahraini Dinar may not get the headlines, but it holds its ground thanks to a rock-solid USD peg and a thriving financial sector. As a gateway to the Gulf, Bahrain has built a reputation as a banking and investment hub, with the regulatory chops to back it up.

While oil still plays a role, the kingdom’s smart pivot into finance, tourism, and services has given the BHD more than one leg to stand on. Add close ties to Saudi Arabia and deep integration with the wider Gulf economy, and you've got a currency that’s quietly powerful and built to last.

3. Omani Rial (OMR)

Exchange Rate: 1 OMR = 2.60 USD | 1.92 GBP

Oman’s currency doesn’t just ride the oil wave - it’s powered by long-term vision. While crude still plays a role, the Omani Rial stands tall thanks to the country’s steady shift toward tourism, logistics, and manufacturing, all part of its ambitious Vision 2040 roadmap.

In a region known for volatility, Oman sets itself apart with political stability, disciplined fiscal policy, and a refreshingly balanced economic game plan. The result? A currency that’s not just strong, but built on more than just barrels.

4. Jordanian Dinar (JOD)

Exchange Rate: 1 JOD = ~1.41 USD | 1.08 GBP

Jordan doesn’t have oil fields or massive exports, but it does have one of the most stable currencies in the region. Pegged to the USD since 1995, the Jordanian Dinar has held firm through geopolitical shocks and economic headwinds.

What’s the secret? A central bank that plays it straight, a government that manages its books carefully, and a commitment to stability - even while supporting large refugee populations and navigating limited natural resources. In short: smart policy over raw power.

5. British Pound Sterling (GBP)

Exchange Rate: 1 GBP = 1.35 USD

As the world’s oldest currency still in circulation, the British Pound carries serious legacy power, but it’s more than just tradition. Backed by the UK’s diversified economy and London’s role as a global finance heavyweight, the pound remains one of the most widely held reserve currencies on the planet.

Let’s call a spade a spade. While Brexit brought its fair share of turbulence, the fundamentals haven’t changed: a strong legal system, deep capital markets, and world-class financial infrastructure keep the GBP firmly in the heavyweight league.

6. Cayman Islands Dollar (KYD)

Exchange Rate: 1 KYD = ~1.20 USD | 0.89 GBP

With more registered companies than people, the Cayman Islands punch way above their weight in global finance. The KYD benefits from this offshore powerhouse status, where financial services and tourism drive steady demand.

Pegged to the US dollar, the currency stays stable, while the islands’ investor-friendly regulations and tax perks keep international capital flowing. It’s a niche economy, but a well-oiled one, and the KYD reflects that strength.

7. Gibraltar Pound (GIP)

Exchange Rate: 1 GIP = 1 GBP (perfect parity)

The Gibraltar Pound holds a 1:1 peg with the British Pound, giving it the full weight of UK monetary policy with a distinctly local twist. It’s a territorial currency that does more than just mirror the GBP; it powers a compact but strategic economy.

Perched at the gateway to the Mediterranean, Gibraltar leverages its prime location and tight financial regulation to attract investment and business. The result? A stable, trusted currency backed by both geography and governance.

8. Swiss Franc (CHF)

Exchange Rate: 1 CHF = ~1.10 USD | 0.88 GBP

Listen, the Swiss Franc doesn’t just symbolise stability - it sets the standard. Backed by political neutrality, low inflation, and one of the world’s most trusted banking systems, the CHF is where capital goes when things get shaky.

The Swiss National Bank’s conservative approach and Switzerland’s strict fiscal discipline make the Franc a magnet for investors seeking security. In times of global turbulence, the CHF doesn’t flinch, it holds.

9. Euro (EUR)

Exchange Rate: 1 EUR = ~1.05 USD | 0.84 GBP

The Euro ties together 20 EU countries under one economic flag, creating a currency backed by a collective economy even bigger than the U.S. Despite political bumps and economic contrasts across member states, the EUR holds its ground as the world’s second-most traded currency.

What keeps it strong? The European Central Bank’s monetary oversight, the eurozone’s combined economic weight, and the Euro’s deep role in global trade and reserves. It’s not just shared money, it’s shared strength.

10. United States Dollar (USD)

The global standard

The USD may not top the exchange rate charts, but some might argue that it owns the global stage. Involved in nearly 88% of all forex trades and held as the primary reserve currency by central banks worldwide, the dollar is the backbone of international finance.

Its strength isn’t necessarily about value per unit, it’s about reach. From oil pricing to cross-border deals, the USD is the language of global trade, powered by the world’s largest economy and the deepest capital markets on earth.

What makes a currency strong?

Strong currencies aren’t just about optics: they’re built on trust, economic fundamentals, and global demand. The world’s top performers all share a few key traits that keep investors confident and capital flowing.

So, what drives currency strength?

At the core, it’s about stability and credibility. Countries with steady politics, transparent institutions, and clear economic policies tend to attract global investment. High interest rates - when balanced with low inflation - pull in foreign capital, while low inflation protects the currency’s real-world value.

Trade matters too. When a country exports more than it imports, global buyers need the local currency, driving demand and pushing up value. Large foreign exchange reserves also give central banks firepower to defend their currency when markets wobble.

Debt is another big one. Lower debt-to-GDP ratios signal fiscal discipline and room to manoeuvre during economic shocks, key ingredients for long-term currency trust.

Pegged vs floating exchange rates

Currencies typically fall into two camps: pegged or floating.

• Pegged currencies (like the Bahraini Dinar or Jordanian Dinar) lock their value to another, usually the US dollar - yes, just like stablecoins. This provides predictability for trade and investment, but demands strict monetary control and healthy reserves to keep the peg in place.
  
  
• Floating currencies (like the Swiss Franc or British Pound) let market forces do the work. That means more volatility, but also more flexibility when shocks hit, if central banks know what they’re doing.

Both systems have their strengths. The key is whether the country can maintain trust through smart policy, solid reserves, and consistent economic performance.

Honourable mentions

While these currencies didn’t make the top 10, they still offer stability, liquidity and are backed by solid economic fundamentals.

These currencies benefit from resource wealth, strong institutions, or strategic economic positions that support their value in global markets.

How is currency value measured?

Currency strength isn’t measured in a vacuum, it’s always relative. Exchange rates compare one currency against another (like USD/EUR), and those prices shift constantly based on supply, demand, and investor sentiment.

In deep, liquid markets, these rates reflect what the world thinks about a country’s economy, stability, and future outlook. Big trades happen fast and without much friction because major currencies have enough volume to absorb them.

Central banks keep a close eye on all this. In floating systems, they rarely intervene unless things get choppy. But day to day, it’s market forces that drive currency values, shaped by fundamentals and the collective mood of global finance.

What is the most stable currency in the world?

No drama, no surprises: the Swiss Franc is the gold standard for currency stability. Backed by political neutrality, low inflation, and ultra-consistent monetary policy, the CHF has earned its reputation as a safe-haven asset.

The Swiss National Bank doesn’t chase headlines. Instead, it focuses on one thing: price stability. And it’s done that with surgical precision for decades. Add in a political system designed for consensus and slow, steady change, and you get a currency that markets trust, especially when things get rough.

In times of crisis, global capital flows to the Franc. That trust? It reinforces the CHF’s strength, year after year.

What is the most traded currency in the world?

Likely no surprises here either: The dollar is (currently) the backbone of the world’s financial system. Accounting for nearly 90% of all forex trading, it’s the go-to for everything from central bank reserves to international commodity pricing.

Around 60% of global foreign exchange reserves are held in USD, and even countries with no direct US ties use the dollar to price and settle trades. This widespread use creates powerful network effects - the more the dollar flows, the more stable and liquid it becomes, drawing in even more users.

It’s a self-reinforcing cycle, fueled by the sheer size and strength of the US economy.

Conclusion 

Currency strength goes beyond daily exchange rates. It’s a reflection of a nation’s economic health, fiscal discipline, and political stability. While rates bounce around day-to-day, the core drivers of strength are built to last.

Knowing what fuels currency power isn’t just academic, it’s critical for smart investing, international business, and even planning your next trip. The strongest currencies aren’t just the ones with high numbers, they’re the ones backed by solid economics and trusted institutions that keep value steady over time.

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Imagine you walk into a grocery store with only $20 in your wallet. You want fruit, bread, milk, and maybe a treat. But as you add items to your basket, you realize you can’t afford everything. You need to make a choice. That everyday dilemma is scarcity in action.

Scarcity is the fundamental economic problem: people have unlimited wants, but our pool of resources (money, raw materials, and of course, time) is limited. Because of this imbalance, every decision comes with trade-offs. Scarcity is not just about wealth or poverty; it shapes the psychology of markets and investments, and understanding it can give you a sharper edge in your decisions. So, join us and let’s tap into the core of economics.

What Is Scarcity? Key Takeaways

Economics tells us scarcity is the lack of plentiful resources in comparison to theoretically infinite wants. This term can be boiled down to this simple definition: any resource with a non-zero cost associated with consuming it means that it's scarce to some degree.

The concept of scarcity often drives people to make decisions about how they want their resources allocated so that everyone can satisfy not just their basic needs, but also additional wants whenever they can.

• Scarcity means limited resources vs. unlimited wants.
  
  
• It’s the foundation of supply and demand, influencing prices in every market.
  
  
• Scarcity affects everyone, not just those with fewer resources.
  
  
• It forces individuals, businesses, and governments to make decisions about allocation.
  
  
• Every choice under scarcity involves opportunity cost, the value of the next best alternative.
  

The Economic Foundation of Scarcity

In 1932, Economist Lionel Robbins gave the most cited definition: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” This definition highlights the key concept: people want more than the economy can provide. Resources are finite. Choices must be made about how to use them.

Scarcity is tied to supply and demand. If a product is scarce and demand remains high, the price usually rises. For example, when microchips became scarce during the pandemic, the cost of everything from laptops to cars increased. This basic economic problem applies in any given scenario: whether you’re a student managing study time, a household balancing bills, or a government allocating healthcare budgets, scarcity forces tough decisions.

Types of Scarcity

Economists classify scarcity into three major types:

• Absolute Scarcity: Resources that are genuinely finite, such as oil, rare earth minerals, or land in city centers. Once they are gone, they cannot be replenished.
  
  
• Relative Scarcity: Resources that may exist in abundance overall but are limited by distribution or production. For example, in water-rich areas, people seemingly never have to worry about running out of water as the supply is limitless while in other areas people have no access to clean running water. In water-scarce areas, the costs increase, and authorities and citizens have to decide how to efficiently allocate resources. The same can be said about land prices when you compare the prices of properties in the countryside versus an affluent city center. Authorities cannot simply produce more land, so the prices increase alongside demand.
  
  
• Artificial Scarcity: Created by humans, often in markets. Luxury brands limit production to increase exclusivity, or companies use patents to control product availability. Concert tickets are another example. Limited supply is maintained even though more could be produced.

Real-World Examples of Scarcity Throughout History

Scarcity is not abstract; it shapes all markets:

• Modern Housing Markets: In cities like London or New York, limited land and high demand create soaring property prices, a textbook case of relative scarcity.
• Concert Tickets: Popular events sell out in minutes, not necessarily because of physical limits but because scarcity marketing drives urgency.
• Ethereum Fee Burn: Since 2021, Ethereum burns a portion of every transaction fee, reducing the total supply. This scarcity mechanism can increase the value of ETH over time, illustrating how limited supply and high demand influence markets in the crypto world.

What Are the Three Causes of Scarcity?

Scarcity is a term that economists use to describe the limited availability of a good or resource, turning some things that might have once been abundant into scarce resources. The root causes can be broken down into three categories: 

Demand-induced scarcity: when consumer demand outweighs supply, e.g. face masks in the wake of the global pandemic. 

Supply-induced scarcity: This happens when outside forces make a resource less attainable, decreasing supply with little impact on demand. E.g. commonly with a natural resource, such as water in a drought.

Structural scarcity: When some have greater access to a resource than others. Structural scarcity often happens because of political or economic reasons.

The Psychology of Scarcity

Scarcity doesn’t just change markets; it changes how people think. Behavioral economists describe the scarcity effect. This is when people perceive something as scarce, its perceived value increases. That’s why limited-edition sneakers sell for thousands.

Scarcity also fuels FOMO (Fear of Missing Out); the opposite of FUD (fear, uncertainty, and doubt). Marketers use countdown timers, “only 3 left in stock” alerts, and exclusive drops to trigger quick decisions. While artificial, these tactics rely on the same psychological mechanisms as natural scarcity. At a personal level, scarcity of time or money can narrow focus, sometimes leading to poorer decisions such as payday loan cycles or unhealthy food choices when stressed.

Scarcity in the Natural World

We usually think of scarce resources as natural resources that exist on Earth without humankind's intervention, such as gas, coal, or water. These commodities often have a limited supply. Food can be produced, for example, but the fuel we need to move it around is gone forever once we use it.

The scarcity of natural resources also generally increases with growing populations. This brings in relative scarcity, which refers to the scarcity of a resource in one region while it may be more abundant in another. This concept applies not only to commodities but also to services that rely on these resources.

Scarcity in the Economy

Economic scarcity occurs when the quantity individuals want to purchase exceeds the amount available for trade, driving up its monetary value. For instance, Bitcoin, with its limited supply of 21 million coins, illustrates this concept. As the coins become scarcer, their value grows higher, making it a potentially valuable choice for traders.

Scarcity vs Shortage

While scarcity and shortage might sound like interchangeable terms, there are several key differences between these terms and very different causes. 

Scarcity looks at the limited availability of something that cannot be replenished, natural resources for example. On the other hand, a shortage refers to a market phenomenon where the demand for something is greater than the quantity supplied at the market price.

When the market is balanced, there is an equal amount of supply and demand for a product. If these become unbalanced, we can have a shortage. Several things can create this scenario.

Firstly, it could be a result of increased demand. This is rarely permanent and can easily be reproduced. Secondly, it could be a result of a decreased supply. If the costs of a product increase causing the manufacturers to create less, and the demand stays the same, this will result in a shortage. In both instances, changes to the market can fix this. 

The main difference between scarcity and shortages is that shortages can usually be solved by altering supply and demand. With scarcity, however, there is a limit on the amount of a resource available with little that can be done to fix this problem. 

Living with Scarcity: Conclusion

Scarcity is the foundation of economics because it forces human decisions about how to use limited resources. It influences markets, prices, and behavior, from choosing groceries to managing global energy supplies.

While scarcity cannot be eliminated, societies can manage it through innovation, trade, and better information. Recognizing opportunity costs and making informed decisions helps individuals and governments alike.

Ultimately, scarcity reminds us one thing, which is that value comes from limits… and that every choice matters.

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You asked, we delivered. We took your feedback and built Auto Top-Up to take the stress out of managing your spending. Your card stays ready to go, so you can focus on more important things (like deciding what to order for lunch).

And here’s the cherry on top 🍒—you can now use your crypto for payments!  Pick any of your crypto holdings, top up your card, and start spending—simple as that.

Let’s break it down and show you why Auto Top-Up is about to be your new favorite feature.

No More "Oops, My Balance!" Moments 🙀
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With Auto Top-Up, you're in complete control. You decide:

• The minimum balance that triggers an automatic reload amount.
• How much to add when your balance dips below your set threshold.
• Which currency you want to use.

Imagine you're about to make an important purchase, only to realise your card balance is too low. Frustrating, right? Those days are over. 

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Built for peace of mind 😌

Auto Top-Up takes the hassle out of managing your card. Whether you’re travelling, shopping online, or covering everyday expenses, your Tap card will always have your back when you need it.

Ready to get started? 

Make sure your Tap app is up to date to start using the new Auto Top-Up feature, and then follow the flow within the Card section. 

Got any questions about Auto Top-Up? Our support team is ready to help you get started. 

Cryptocurrencies derive their value from supply and demand, with the buyers and sellers playing an enormous role in the market's liquidity, and ultimately, success. This rings true for stocks, commodities and forex markets too, essentially any asset markets with trading volumes.

Anyone participating in these markets will have been a maker or a taker at some stage, most likely, both. In this article, we're breaking down the concept of makers vs takers, exploring their vital role in the market and large quantities of these result in stronger exchanges. 

Liquidity Explained

Before we dive in, let's first cover an important concept: liquidity. Assets can sometimes be described as liquid or illiquid, this simply refers to how easily the asset can sell. Gold is a prime example of a liquid asset as anyone could easily trade it for cash without any hassle, while a glass statue of your neighbour's cat would be an illiquid asset as the chances of anyone wanting to own it are slim (except for the neighbour, maybe). 

Building on this, market liquidity indicates how liquid a market is. A liquid market means that the asset is in high demand, traders are actively looking to acquire the asset, while also having a high supply, meaning that traders are actively looking to offload the asset. An illiquid market then means that there is low supply and demand, making it difficult to buy or sell the asset for a fair price.

In a liquid market where there are many traders looking to buy and sell an asset, the sell order (ask price) tends to be in the same region as the buy order (buy price). Typically, the lowest sell order will be the same as the highest buy order, creating a tight buy-ask spread. 

Now that we've covered liquidity, it's time for makers vs takers. 

What Is The Difference Between Market Makers And Market Takers?

As mentioned above, any successful exchange requires a fair amount of makers and takers. Let's explore the difference between the two below. 

Market Makers

Exchanges typically use an order book to conduct trades. The order book will store offers to buy and sell as they come in, and execute the trades when the criteria are met, i.e. someone could create an offer that says when Bitcoin reaches $40,000, buy 4. When the BTC price reaches $40,000, the order book with automatically execute this trade. 

In this case, the person creating this buy order is known as a maker. They are essentially "making" the market by announcing their intentions ahead of time via the order book. While many retail investors are makers, the field is typically made up of big traders and high-frequency trading institutions. 

A market maker is a liquidity provider. ‍

Market Takers

Market takers are then liquidity "takers", removing liquidity from the market. Takers create market orders that indicate to the exchange that the trader wants to buy or sell at the current market price. The exchange will then automatically execute the trade using a maker's offer.

A taker is a trader filling someone else's order. Market makers create offers for the order book, making it easier for users to buy and sell, while market takers exercise this liquidity by buying the asset. 

What Are Maker-Taker Fees?

You might have heard of maker-taker fees before, this makes up a considerable amount of how exchanges generate an income (after all, exchanges are businesses that need to make money). When an exchange matches a maker and a taker, they will take a small fee for the efforts on their part. This fee will differ from exchange to exchange, and will also be dependent on how big of a trade it is. 

As makers are providing liquidity to the exchange (an enticing attribute for any trading platform) they will pay lower fees compared to a trader taking away from the platform's liquidity. Always be sure to check the fee structure and pricing on a platform before engaging in any trading activity, these will be outlined in the platform's trading policy.

How Do Trading Companies Make Money?

Cryptocurrency and blockchain technology was designed to provide a decentralized financial system that bypasses government control. However, to alleviate regulatory concerns, exchanges were established to provide a reliable and convenient means of operating within the crypto markets. These exchanges provide a secure way in which users can buy, sell and trade cryptocurrencies, and in return make money through the activities of its customers as it is a business after all.

While maker and taker fees make up a large portion of how a platform generates an income, the business also generates income through deposit and withdrawal fees, commissions made on trades and listing fees. These typically make up the cost of production and running the business.

In Conclusion

Market makers contribute to the market's liquidity by creating orders looking to be filled, while market takers fill these orders. Makers are typically rewarded for bringing liquidity to a platform with low maker fees, while takers pay higher fees when they make use of this liquidity, easily buying and selling the asset. 

Getting paid in cryptocurrencies has opened the global gig economy to endless opportunities. Gone are the days of needing to be in the same country, or even on the same continent, as your employer. Cryptocurrency jobs are not only more accessible but also more acceptable.

In this article, we’re breaking down where you can find jobs that specifically pay in cryptocurrencies. Before we do though, let’s touch base on the advantages the new digital currency realm is offering. 

The Advantages Of Being Paid With Blockchain Technology

The ever-evolving blockchain industry is now integrating cryptocurrencies into traditional job markets, from temporary gigs to full-time jobs, anyone can now get paid in crypto.

The decentralized world of cryptocurrencies provides many demographics with many advantages. For employees, these advantages allow the job market to be blown wide open as international payments are now easily accessible and don’t come with high transaction costs and delays. 

Due to the nature of crypto transactions, payments can be executed in a matter of minutes with minimal transaction fees offering a quick and cost-effective solution to moving money across borders. The minimal transaction fees also allow freelancers to take on many smaller projects, an opportunity otherwise impossible with international fiat transactions. 

Arguably the biggest advantage to cryptocurrency jobs is that anyone anywhere can now work for anyone anywhere, as borders are no longer a consideration. With many freelancers turning to remote work after the pandemic, the opportunity to work on international projects and be conveniently paid for doing so has increased dramatically. 

No matter your skill set or ability, there is likely a business out there willing to hire you.

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Where Job Seekers Can Connect With A Crypto Job Board

1. LaborX

LaborX is a job board-style website that connects employers with employees, covering everything from small temporary jobs to full-time ones, from data scientists to marketing managers. The platform also offers a wide range of cryptocurrencies as payment options. 

LaborX is owned and operated by a blockchain company that also offers HR software solutions, which makes it feel more accountable and solid. 

2. Jobs4Bitcoins

Despite what the name suggests, Jobs4Bitcoins offers a range of crypto-paying jobs. Run as a Reddit channel, r/Jobs4Bitcoins, the forum allows anyone to post a job they require or skills they can provide. 

While not run in the traditional job-seeking website sense, the opportunities for finding work and self-promotion are endless. There is obviously no vetting of employees or employers, however, so bear this in mind when engaging on the platform.

3. Blocklancer 

Blocklancer matches job seekers with job providers and pays in Ethereum. If you’re not fond of Ethereum, no problem, you can easily trade it for another cryptocurrency or fiat currency through the Tap app once you have received the funds. 

The platform covers a wide range of jobs, from research analyst to content creator to experts in the field of blockchain and ICOs. It also offers an ​​option allowing users to help mediate disputes. 

4. Bitfortip

If the formal job market is not what you are looking for, you can earn tips in Bitcoin for offering suggestions. Not only Bitcoin, you can also earn Bitcoin Cash, NANO, and Tezos.

Users post their questions and then should they find your idea or suggestion helpful, will tip you. 

5. PompCryptoJobs

PompCryptoJobs was created to connect job seekers with providers within the crypto space. The platform caters to an extremely wide range of fully-paid crypto positions, from writer to product designer to data scientist. 

The platform is professional, neat and informative, and is used by some of the biggest companies in the crypto space. 

Whether you're a research analyst, marketing manager or data scientists, there are plenty of job opportunities that pay in crypto.

Final Thoughts: How To Get Paid In Crypto

If you’re unsure on how to go about getting an account that enables you to be paid in Bitcoin or other cryptocurrencies, look no further than Tap.

Tap offer to freelancers and self employed accounts, enabling you to receive payments in both crypto and fiat currencies. When creating an account, you will immediately gain access to a number of crypto wallets, as well as dedicated money accounts from where you can access the individual wallet addresses. Simply send the wallet address to your employer and the funds will clear in minutes (depending on the network). 

On top of that, Tap also allows enables you to pay your bills and everyday purchases with your Tap card to spend your fiat and cryptocurrencies in a swipe of the wrist.

Investing centers around making gains off of your initial capital. When determining the potential gains one could make there are a number of variables one needs to consider, such as how much capital one has put into the investment and what returns are associated with that asset class.

This led to the creation of ROI (return on investment), a measure that allows anyone to calculate the net profit or loss of an investment in percentage form. 

What is return on investment?

All investments, including stocks, bonds, real estate, and small businesses, come with the goal of making more money than you put in. The money you earn over and above your initial investment is called profit. When discussing investment profitability, people often use the term ROI, meaning return on investment. This metric expresses the amount of net profit one can earn/earned as a percentage of what the initial investment was.

ROI can help you assess if buying property or investing in a business is worth it. It's also helped companies determine the value of adding new products, building more facilities, acquiring other businesses, advertising campaigns, etc.

ROI (return on investment) is the percentage of gain or loss on an investment relative to the total cost of the investment.  In other terms, it's a way to compare different investments in order to figure out which ones are worth pursuing. For example, you could calculate ROI to decide whether selling one stock and buying another would be a good idea.

While there is no limit to a return on investment theoretically, in practice, no investment is guaranteed to have any return. If your ROI is negative, it means you not only failed to make a profit but also lost some of your original investment. The worst possible outcome would be -100% ROI, meaning you completely lost your initial investment. An ROI of 0% signifies that you at least recovered the money you put in, but gained nothing beyond that.

While ROI is often used as a marker of profitability, it isn't foolproof. There are several limitations to calculating ROI as your only measure which include the time frame in which you will earn back your investment, inflation rates, how risky a venture is, and additional maintenance costs that may be incurred.

Calculating ROI terminology

Before we dive in, let's first cover some basic terminology.

Net profit or net income

Net profit is the amount of money left over after all operating costs, such as the cost of transaction costs or maintenance costs, and other expenses have been accounted for and subtracted from the total revenue. It is used to measure profitability. Net profit can also be called net income, net earnings, or the bottom line.

Total cost of investment

This figure will look at the amount of money invested in a particular investment.

How to calculate ROI: the ROI formula

The ROI formula is a simple equation that looks at the price change of the asset and the net profits (the initial cost of the investment minus its value when you sell it). When calculating ROI you would use this formula:

ROI = (Net Profit / Total Cost of Investment) x 100

To factor trading costs into your ROI figure, you'll use: 

ROI = ((Value of Investment - Cost of Investment – Associated Costs) / Cost of Investment) x 100

As an example, let's say you buy 5 shares of $100 each in Twitter, equating to $500. You sell them a year later for $150 each, equating to $750. Let's say you paid $5 commission on each trade, costing you $25 in trading fees. 

ROI = (($750 - $500 - $25) / $500) x 100 = 45%

This means that you made a 45% return on investment on that particular investment.

How to determine a strong ROI

A "good" return on investment is any number above 0, as this means you made some profit. However, the ideal ROI should be higher than what you could've earned had you chosen another investment (the next best thing). 

To compare this, investors often compare their earnings to what they could've made on the broader stock market or in a high-yield savings account. Using the S&P 500 as a control, over the past four decades it has made gains of around 7% (after inflation). An ROI is generally considered to be a strong one if it beats the stock market in the long term. 

It's always important to note that past performance does not equate to future results. Another pearl of wisdom to remember is that high rewards generally come alongside high risks. If an investment promises very high ROIs, consider this also means that it comes with high risks. 

Therefore, a strong ROI will vary depending on the investment's level of risk, your goals, and how much risk you're willing to take.

Where the ROI formula falls short

The main limitation of using this return on investment ROI formula as a marker of success is that it doesn't show how long it took to earn the money back. When comparing various investments, the time it takes to mature will have a significant impact on the profits you could earn.

For instance, a year loan versus a bond held for five years versus a property held for 10 years will all have varying ROIs once you've established how long it will take to earn the specified ROIs. 

In this scenario, the ROI calculations mentioned above skimp on the full story. It also doesn't account for risk. For instance, the loan repayments could be delayed or the property market might be in a slump, all affecting the potential profits earnable.

With many variables, it becomes harder to predict what the exact ROI calculation on an investment will be, so be sure to factor this in when using the return on investment ROI formula to determine how attractive an investment opportunity or business venture is. 

ROI alternatives

Although the return on investment doesn't consider how long you keep an asset, it's essential to compare the ROI of investments held for comparable lengths of time as a more clear performance measure. If that's not possible, there are a few other options.

Average Annual Return

Also known as annualized return on investment, this adjusts the ROI formula to factor in the timing. Here you would divide the ROI by the number of years you hold the asset.

Compound Annual Growth Rate (CAGR)

This option is more complicated but yields more accurate results as it factors in compound interest generated over time. 

Internal Rate of Return (IRR)

This measure factors in the notion that profits earned earlier outway the same profits earned later, taking into account interest that could've been earned and factors like inflation. This equation is quite complicated but there are online calculators one can use. 

Conclusion

A return on investment (ROI) is a formula used to calculate the net profit or loss of an investment in percentage form. The ROI calculation can present valuable information when investing capital or determining profitability ratios. The ROI equation looks at the initial value of one investment and determines the financial return. A negative ROI indicates that the investment returns were lower than the investment cost.