Learning the friendly way

Bitcoin has become a worldwide phenomenon due partly to its incredible innovation in terms of technology and cross-border payments, but also because of its unbelievable market performance over the last decade.

The original cryptocurrency was even voted the top performing asset of the past decade, and there is no denying why. So, how does it all work? Today we’re uncovering everything you need to know about the inner workings of the most powerful cryptocurrency.

Bitcoin 101

Before we dive into how Bitcoin works, let’s cover the basics. Bitcoin is a peer-to-peer electronic payment system that was launched in 2009 by Bitcoin's creator, Satoshi Nakamoto, an anonymous entity that remains a mystery to this day. The Bitcoin blockchain ignited blockchain technology, propelling it into the 21st century and allowing anyone connected to the internet to embrace the new age of technology.

Bitcoin was designed as a response to the global financial crisis and set to be a decentralized payment system that was exempt from banking institutions’ central authority and errors. Over the past decade, the cryptocurrency has increased in value, hitting $20,000 for the first time in 2017, again in December 2020, before soaring to highs of $68,789.63 in November 2021.

The Bitcoin blockchain network has also paved the way for many other virtual currencies, of which there are currently over 20,000. The industry has grown into a sizable $1 trillion market (valued at one stage at over $3 trillion), most of which has Bitcoin to thank. Bitcoin currently dominates the market with a 40% share and has created a name for itself in the mainstream as more and more businesses decide to accept Bitcoin.

How exactly does Bitcoin work?

Now that we’ve covered the basics, let’s get into the nitty-gritty. As previously mentioned, Bitcoin is a peer-to-peer digital currency that does not rely on any third-party financial institutions, banks or governments. Instead, the network and all Bitcoin transactions are operated by a network of nodes (computers) and miners. Users store Bitcoin in a digital wallet.

In simple terms, miners are responsible for verifying transactions while nodes keep records of all the transactions on the Bitcoin network. All transactions are added to the blockchain, which is a public ledger of all activity on the Bitcoin network. This is a simple look at how Bitcoin mining works.

Looking more deeply into this, let’s say one person in Belgium is sending Bitcoin to someone in England. The Belgium person will enter the Bitcoin address (also known as a wallet address) of the recipient and indicate how much they would like to send. The Bitcoin wallet through which it is being sent will calculate the transaction fees, the Belgium person will confirm (also checking they are happy with Bitcoin's price), and the Bitcoin transaction will enter a “mempool” of new transactions.

From here, Bitcoin miners will fight to solve a complex mathematical puzzle and the first one to do so correctly will be allowed mine the next block and verify all pending Bitcoin transactions (the process of Bitcoin mining). The miner will then verify that all senders of the transactions have sufficient balances, and the transactions will be executed.

The miner will then add the new block to the blockchain, and it will be circulated amongst the network. Once all the nodes approve, they will all update their blockchain records with the new block.

The person in England will then get a notification to say that they have received the Bitcoin transaction, and will most likely require 3 confirmations before being able to access the funds (some digital wallets and merchants require 6 confirmations). Confirmations are represented by new blocks added to the blockchain following the block with that specific transaction. Blocks take 10 - 40 minutes to be created due to the Bitcoin mining process.

While this is how Bitcoin transactions take place, other cryptocurrency transactions might vary slightly.

Where do new Bitcoins come from?

Satoshi Nakamoto designed the cryptocurrency to be deflationary in nature, intending the price to increase over time as opposed to decreasing like fiat currencies, offering not only a reliable payment method, but also an investment opportunity. Bitcoin has a fixed supply of 21 million coins, with a certain number being released each year.

Initially, the mining reward for mining a block on the Bitcoin blockchain was 50 BTC, but after every 210,000 blocks (roughly 4 years) the reward halves. In May 2020, the third halving took place, driving the block rewards down to 6.25 BTC per block. This equates to roughly $230,000 at the time of writing.

So where do new Bitcoins come from? Each time a miner verifies a bundle of transactions, the miner will receive each transaction’s network fee and once they have mined enough transactions to complete a 1MB block and add it to the blockchain, they will receive the mining reward too. 

Once the 21 millionth coin has been mined no new coins will ever enter circulation. 

Ready to enter the wonderful world of Bitcoin?

Now that you understand more about the original cryptocurrency and how Bitcoin works, are you ready to enter the market? For easy onboarding, Tap provides a secure platform from where anyone can buy and sell Bitcoin and a number of other cryptocurrencies. Secure, easy to use, and conveniently accessible through a mobile app, Tap is both beginner friendly and perfect for seasoned traders.

Since the debut of Bitcoin in 2009, central banks have been living in fear of the disruptive technology that is cryptocurrency. Distributed ledger technology has revolutionized the digital world and has continued to challenge the corruption of central bank morals. 

Financial institutions can’t beat or control cryptocurrency, so they are joining them in creating digital currencies. Governments have now been embracing digital currencies in the form of CBDCs, otherwise known as central bank digital currencies. 

Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country's fiat currency, acting as a digital currency version of the national currency. CBDCs are created and regulated by a country's central bank and monetary authorities.

A central bank digital currency is generally created for a sense of financial inclusion and to improve the application of monetary and fiscal policy. Central banks adopting currency in digital form presents great benefits for the federal reserve system as well as citizens, but there are some cons lurking behind the central bank digital currency facade.

Types of central bank digital currencies

While the concept of a central bank digital currency is quite easy to understand, there are layers to central bank money in its digital form. Before we take a deep dive into the possibilities presented by the central banks and their digital money, we will break down the different types of central bank digital currencies. 

Wholesale CBDCs

Wholesale central bank digital currencies are targeted at financial institutions, whereby reserve balances are held within a central bank. This integration assists the financial system and institutions in improving payment systems and security payment efficiency. 

This is much simpler than rolling out a central bank digital currency to the whole country but provides support for large businesses when they want to transfer money. These digital payments would also act as a digital ledger and aid in the avoidance of money laundering.

Retail CBDCs

A retail central bank digital currency refers to government-backed digital assets used between businesses and customers. This type of central bank digital currency is aimed at traditional currency, acting as a digital version of physical currency. These digital assets would allow retail payment systems, direct P2P CBDC transactions, as well as international settlements among businesses. It would be similar to having a bank account, where you could digitally transfer money through commercial banks, except the currency would be in the form of a digital yuan or euro, rather than the federal reserve of currency held by central banks.

Pros and cons of a central bank digital currency (CBDC)

Central banks are looking for ways to keep their money in the country, as opposed to it being spent on buying cryptocurrencies, thus losing it to a global market. As digital currencies become more popular, each central bank must decide whether they want to fight it or profit from the potential. Regardless of adoption, central banks creating their own digital currencies comes with benefits and disadvantages to users that you need to know. 

Pros of central bank digital currency (CBDC)

• Cross border payments
• Track money laundering activity 
• Secure international monetary fund
• Reduces risk of commercial bank collapse 
• Cheaper
• More secure
• Promotes financial inclusion

Cons of central bank digital currency (CDBC)

• Central banks have complete control
• No anonymity of digital currency transfers
• Cybersecurity issues 
• Price reliant on fiat currency equivalent 
• Physical money may be eliminated 
• Ban of distributed ledger technology and cryptocurrency

Central bank digital currency conclusion

Central bank money in an electronic form has been a big debate in the blockchain technology space, with so many countries considering the possibility. The European Central Bank, as well as other central banks, have been considering the possibility of central bank digital currencies as a means of improving the financial system. The Chinese government is in the midst of testing out their e-CNY, which some are calling the digital yuan. They have seen great success so far, but only after completely banning Bitcoin trading.

There is a lot of good that can come from CBDCs, but the benefits are mostly for the federal reserve system and central banks. Bank-account holders and citizens may have their privacy compromised and their investment options limited if the world adopts CBDCs.

It's important to remember that central bank digital currencies are not cryptocurrencies. They do not compete with cryptocurrencies and the benefits of blockchain technology. Their limited use cases can only be applied when reinforced by a financial system authority. Only time will tell if CBDCs will succeed, but right now you can appreciate the advantages brought to you by crypto.

Public and private keys are integral to the use of cryptocurrencies. They not only allow people to send and receive cryptocurrencies but also to maintain the security and ownership of the funds. Private and public keys are generated when one creates a digital wallet.

What is a private key?

Every cryptocurrency wallet consists of a public key and a private key. Anyone can deposit cryptocurrency into a public address (public key), but no one except the owner of the corresponding private key can remove funds from that same account.

A private key, also known as a secret key, is a random string of numbers and/or letters used to protect one's cryptocurrency wallet and receive crypto transactions, similar to a pin code for a bank account. Private keys prove ownership of one's wallet address, protect it from unauthorized access and theft, and are used to sign transactions on the blockchain. 

Private keys are used in conjunction with an algorithm to encrypt or decrypt data. The holder of the private key should be the only one who knows it, as this secrecy is what gives the private key its power. The golden rule is to keep your private key safe.

Private key vs public key

Public and private keys are mathematically linked to each other and relevant to only one blockchain wallet. A public key can be compared to your traditional bank account while the private key is akin to the pin code to access this account. 

Users would share the public key with anyone looking to transfer funds to their crypto wallet, however, under no circumstances should your unique private key ever be shared with anyone. It is also strongly recommended that one stores their private key offline in a safe space, and not on a desktop or accessible location (in the event of a hack).

When one loses their private key, whether lost or maliciously taken, they will lose access to their crypto funds. Due to the decentralized nature of cryptocurrencies, there is no support line or central authority that can access that information.

This is where exchange wallets come in handy as the account is created using an identity that once verified can gain access to the funds. This is known as a custodial wallet where the platform holds the private keys for you and allows you to access the funds through a user-generated password. When it comes to storing private keys, this is the most convenient option, however, if you use an untrustworthy platform that increases your risks greatly. It is strongly recommended to enable two-factor authentication when using this option.

How do private keys work?

A public key is generated using complicated mathematics by your private key, ensuring they form a matched pair. These digital keys are created when one creates their crypto wallet on a particular blockchain. 

After being generated, a private key must be stored in a secure location, ideally offline. Furthermore, private keys can have an extra layer of security by being password-protected, encrypted or hashed, ideally all three.

The owner of the public key will use the private key to encrypt the digital signature when making a transaction. 

A transaction is encrypted using a public key and can only be decrypted by using the matching private key. Therefore, when someone sends a transaction they will need their private key to decrypt and prove they own the funds being used in this transaction. 

The private key is used to sign the transaction, which verifies that the transaction hasn't been modified. A digital signature is created when someone combines their private key with the data that's being sent as part of a transaction. 

Once the transaction has been executed the nodes on the network will check and authenticate the details of the transaction and if any information is incorrect the transaction will be rejected. Once executed transactions cannot be reversed. 

Where should you store your private key?

Your private keys are essentially your passwords, so it's of utmost importance that you keep them safe.  Your best bet is to store them offline somewhere safe. This might mean written on a piece of paper, stored on an offline device, or kept in a password manager.  As mentioned above, public keys can be stored anywhere and shared with anyone.

To avoid the hassle and stress of ensuring the safety of your private keys at all times, you can use a hot wallet supplied through a reputable exchange. If you choose to take this route ensure that the crypto platform is regulated and adheres to stringent security measures. The Tap app ticks these regulatory boxes and ensures that customers have full access to their funds at all times, without the risk of losing them if they lose their private keys. 

In conclusion

Private keys are digital passwords used to establish one's ownership in a crypto wallet and are created in conjunction with the public key of the same wallet. One should never share their private keys with anyone. 

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Investors looking to establish a passive income stream often turn to a dividend investing strategy as it provides regular payments from their investments. While dividend investing might sound intimidating to beginner investors, the truth is that with adequate research and understanding it is very simple to tap into.

Dividends are a portion of a company's earnings that are distributed to its shareholders and can provide a reliable source of income (also referred to as dividend income) over the long term. However, not all dividend-paying stocks are created equal, and investors need to carefully evaluate the companies they invest in to make sure that they are making sound financial decisions.

In this article, we will provide six tips for dividend investing that can help investors choose the right stocks and maximize their returns in terms of dividend payments.

Look to mature companies

When implementing a dividend investing strategy and looking at which stocks pay dividends, it is generally advisable to focus on established, mature companies rather than start-ups. Established companies have a proven track record of stability and success, which can provide investors with a sense of security and confidence. Investors will also often research a company's dividend yield to confirm their decision.

A dividend yield is a dividend per share divided by the price per share. It can also be calculated as a company's total annual dividend payments divided by its market capitalization if the number of shares is constant. A good dividend yield is anywhere from 2% - 6%, the higher the better. Lower dividend yields can make a stock appear less competitive relative to its industry.

Mature companies typically have a more predictable revenue stream, which makes it easier to forecast their future earnings and dividends. They also tend to have a history of paying dividends consistently, which is a crucial factor for dividend investors.

Ultimately, it is important for investors to carefully evaluate the financial health and stability of any company they are considering investing in, but for those seeking consistent dividends, established, mature companies are typically a safer and more reliable option.

Look at the company’s dividend payout ratio

The dividend payout ratio represents the proportion of the company's net income that is distributed to shareholders as dividends. This ratio is expressed as a percentage of the company's earnings that are paid out to its shareholders in the form of dividend income.

The payout ratio gives investors a look at how much income is being paid to investors and how much is being retained and used by the company. If a company with high-yield dividend stocks has a high payout ratio (i.e. paying out a large portion of its income to shareholders) this should raise red flags as if this income stream diminishes the dividend income will too. 

Stability pays out in the long run

When looking for dividend-paying stocks, it is important to prioritize stability over quantity. This means choosing companies with a proven track record of steady earnings and consistent dividend payments, rather than simply seeking out the highest dividend yield. 

By selecting quality investments, investors can minimize their risk exposure and reduce the likelihood of unexpected drops in dividend payouts or stock value. Additionally, companies with strong financial health are better positioned to weather market volatility and economic downturns, which can help to protect investors' portfolios in the long term. 

Ultimately, prioritizing stability over quantity is key for any dividend investing strategy.

Always establish your financial goals early on

When looking at buying dividend-paying stocks, first establish a few key goals, like whether growth investing or value investing is a priority for your investment strategy. This will help you determine which companies to seek out, and whether your portfolio can incorporate younger companies. While mature ones will offer consistent and steady payouts, newer ones might present impressive dividend yields in the short term.

By establishing your financial goals before investing you will be able to create a formula to follow that allows you to explore a potentially wider range of options. Always be sure to look at past and present returns and consider the company’s future potential. This will help to establish how profitable the company might be in the future from a dividend growth perspective. 

Know when to cut your losses

Investing in dividend stocks requires a balance between patience and knowing when to cut your losses. While waiting for an investment to pay off can be tempting, holding onto a failing stock can result in significant losses. Recognizing when a stock is underperforming and taking action is crucial to successful dividend investing. 

It's important to monitor the financial health and performance of a company and reevaluate the investment if it fails to meet expectations. Knowing when to cut your losses and sell a stock that is no longer viable can protect your portfolio and help to prevent significant financial losses. Being aware of market trends and the performance of the companies you invest in is key to making informed investment decisions.

Don’t put all your eggs in one basket

Diversifying your portfolio is crucial when investing in dividend stocks to minimize risk and maximize returns. Putting all your money into one or a few stocks exposes you to significant risk if any of them fail. 

By diversifying across multiple companies and sectors, you can spread your risk and minimize the impact of a single stock's performance on your portfolio. Investing in companies with varying levels of financial health and dividend yields can help to create a more balanced portfolio.

Diversification is a key strategy for long-term dividend investors who want to build a stable and sustainable source of passive income while mitigating the risk of significant financial losses.

Additionally, some investors opt to implement a dividend investment strategy that looks to increase dividend yields over time. This process centers around dividend reinvestment which essentially means reinvesting the dividend payout one received. This over time will contribute to dividend growth, in the same way as compound interest works.

In conclusion

Investing in dividend-paying stock is an excellent way of building passive income streams while still building an impressive investment portfolio. With the right approach and adequate research, this can contribute to significant gains for your greater financial goals. 

The golden key is to gauge which stocks, in this case, dividend stocks, provide the strongest returns with minimal risk, and which stocks have the highest dividend growth potential. Implement these 6 golden rules above to better position yourself for success.

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Here we discuss what dividends are and how they work so you can make informed decisions when investing in dividend paying stocks. As a company, regular dividend payments create an incentive for shareholders to remain invested and keep the business growing, while for investors a dividend payment can increase the overall ROI and provide additional income streams. Learn the difference between stock dividends and cash dividends below.

What is a dividend?

Dividends are a way for companies to share their profits with shareholders. When a company earns profits, it can choose to distribute those profits back to its shareholders in the form of dividends. Dividend payments are typically made in cash and are usually paid out every quarter or semi-annually. Dividend paying companies can also choose to pay stock dividends, which is essentially dividend income paid out in shares.

By investing in dividend paying stocks, investors have the potential to earn regular income from their investments as well as benefit from capital appreciation when stock prices rise.

Dividend paying stock and the stock exchange

Investors in the stock market can earn returns in two ways, one is through an increase in the stock price from when they purchased it, and the other is through dividends. A company can decide whether they pay out dividends or not, and it's worth noting that not every company on the stock market does pay out dividends. The ones that do are typically mature ones. 

Companies might instead decide to use the profits to reinvest in the company, hire new employees, or expand their business. Start-ups and newer companies are more likely to take this approach as their goals are more aligned with growth. 

These payments are made in cash and generally occur at regular intervals, be it quarterly or annually. The amount per share, and when and how often dividends are paid out are determined by the company's board of directors.

Why a company might pay dividends 

When a company is profitable, it might do one of these three things with its profits:

• pay off debt
• chase a growth opportunity by reinvesting the money into the business
• pay dividends to their shareholders, attracting new ones and rewarding current ones

Companies pay dividends to reward their shareholders, generating a steady income stream, and increasing the overall value of their stock. Additionally, dividend payments can be used to attract new investors and signal financial strength. Only profitable companies will pay out dividends, and typically ones without significant debt. 

Stocks that pay dividends

Whether a company pays dividends is directly related to its goals and priorities. As mentioned above, younger companies typically use profits to reinvest in the business as the current goal is growth, while more mature, established companies opt to reward (and attract) shareholders. 

Growth stocks

Companies looking to capitalize on growth opportunities might make the wiser move by reinvesting their earnings instead of offering dividends to shareholders. 

Let's use retail as an example. If a company has just released a new product, it'd likely benefit more from hiring additional salespeople who can promote it than partaking in payouts for investors. In doing so, this allows the business to seek out maximum returns and drive the stock price up instead of giving away potential gains prematurely.

Mature stocks

As companies reach their peak and shift to a sustaining stage, they are more likely to prioritize dividend payments for shareholders over investing any additional funds into growth. 

Ultimately, leaders must determine what is best for the company's shareholders depending on its size and age: paying dividends, funding development opportunities, or debt reduction. The ideal choice depends heavily upon the organization’s state of expansion as well as other considerations.

Mutual funds and ETFs

Investors in mutual funds and exchange-traded funds can also tap into dividend income provided that the stocks pay dividends. These are typically paid out on an annual basis, however, this will be determined by the shareholder's brokerage account.

Timeline of dividend payouts

Whether a company pays out dividends at regular intervals or on a once-off basis, below are several dates to note with regard to the when and how of these payments. From the declaration date to the ex-dividend date to the payment date, these all play an important role for investors looking to benefit from dividend yield.

• The Declaration Date

When the Board of Directors announces the value, record date, and payment date for the upcoming dividend.

• Ex-Dividend Date

The ex-dividend date is the final date by which you can buy the stock and earn dividends. If you purchase stock after the ex-dividend date you are not liable to receive dividends. Stock purchases can sometimes take two days to clear so ensure that you do so at the right time. 

• Record Date

The date that you need to be an official shareholder in order to receive dividends. If your stock purchase is not settled by this date you are not liable for the payouts. The record date is typically one date after the ex-dividend date.

• Payment Date

When payments are made to all registered shareholders (as of the record date). Depending on the preferences specified in your brokerage account, the dividend could either be credited to you as cash (cash dividends) or reinvested back into the issuing business, distributed as stock dividends. 

How dividend payments can affect the share price

Due to dividends being paid out by profitable businesses, when a business does pay out dividends this sends a signal to the market that the business is doing well and could drive the stock price up. However, it could have the opposite effect too, driving the price down when there is no dividend payout. 

• when dividends drive the stock price up

Dividends can be a celebration of a company's profits and act as rewards to shareholders for investing in the company. This makes the stock more attractive to investors looking to earn passive income and will ultimately drive the price up. 

• when dividends drive the stock price down 

Companies generally pay dividends only when they are assured that the rate of return can be sustained, thanks to reliable profits. Therefore, if a company announces any reduction in this rate of dividend payment, it is likely because their business is encountering certain difficulties, sending out a negative signal instead.

In conclusion: what is a dividend payment?

A dividend is a payment that companies make to their shareholders, usually in the form of cash or stock. It's a type of reward for investors who have held onto the company's shares for a certain period of time. Usually companies pay dividends on a quarterly basis, often based on a portion of the company’s profits.

Because dividends are usually paid in cash, they can be a great source of income for investors. This extra income comes with less risk than other types of investing, which makes them attractive to many people who are looking for reliable returns on their investments. Dividend stocks also tend to outperform the overall stock market.

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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.