YouTube video by Alberto Costa explaining the distinction between return on investment (ROI) for a single trade and the return of an investor's portfolio. The speaker warns that advertised high ROIs (e.g., 200%) can mislead viewers: ROI is profit over the amount invested in that trade and can be inflated by leverage or cheap capital requirements, whereas portfolio return measures profit relative to total capital. The video gives concrete examples (typical risk per trade 1–3%, take-profit at 2R, and a worked example with a $10 stock, $2 risk per share, 150 shares, $1,500 position, $600 profit → ~40% ROI but 6% portfolio return).
Chapters
Hi, welcome to this new video. The topic today is return on investment. Specifically I want to discuss about the difference between the return on investment and the return of your portfolio. And the reason is that I've seen many videos, many blogs, articles where people are promoting strategies that may create results. It seems so. You see these numbers, 200% return on investment, 150%, 250. And it's not clear sometimes if they are speaking of return, return on investment. So I want to clarify this concept because if it's not clear, it will be very easy to think that these numbers are crazy and very, very good and be confused by them. So let's start first with the concept of return on investment. What is the return on investment? The return on investment, also called roi, is simply the profit that you make with your trade, let's say over the capital that you use. So the amount of money that you invest. So for example, say that you buy hundred dollars of company A and then you make when you sell $200, your ROI is 200, 100 is 2 and in percentage is 200%. That's the idea of return on investment. Now what is the problem here? The problem is this. If you look at these numbers, you may think that, oh, 200% means that if I have a portfolio of say 10,000 K, I can make 20,000 K. That's the problem because on the other hand we have the return. Of your portfolio and this is again the profit that you make over your portfolio value. And you see the difference already. The difference is that here is over the investment for the single operation. Here is over the portfolio value. And this is quite different. If you remember, when we do trading, we should risk for every operation, a small percentage of our portfolio. Usually people say that the risk you should take, the risk per trade. Should be around what, 1 to 3% of your portfolio. Okay? And if you remember, if you remember in, I think it was in a previous video where I was speaking about the take profit in trading, often people take profit at, I don't know, it can be something like 1.5 to 2.5 R where R is the risk. Okay, so let's say that you take profit at 2. To make it simple, okay, let's say that you take profit at 2R. So what does it mean? It means that you are risking, let's be even very, very aggressive, 3% of your portfolio. And then if you take profit with 2R, then you make 6% of your portfolio with a single operation. So the return on the portfolio, return of Your portfolio with this Single operation is 6%. Okay, six. Now let's look at this trade. Let's say for example, that you have. $10 per share, okay? That's the price, the current price, and then your stop loss. So you enter here and your stop loss is at, I don't know, $8 per share and you take profit. We say 2R, so the R is 2, so $14. Actually this is not per share. So you enter there. So you're risking $2 to make 4. Okay? And let's say that your, your portfolio. Is 10K. So if you risk 3% of risk, it means that you are risking $300, right? Okay. So how many shares do you have to buy? Well, what you say is you're risking $2 per share of risk, right? So if you want to risk $300, you need to buy 150 shares. Okay? Now when we buy 150 shares, what are we doing? Well, if we buy a 10, if we buy a 10, then the position is $10. Times 150 shares is $1,500, right? And suppose that this is our investment. And of course, if we are using leverage, it can be even less. For example, you may use a margin account where you need to put 50% or 25% or maybe 10% with CFD. And if we take profit, so let's say that we are lucky and this is a very good trade. We make what we make $600, okay? Because we sell at 14. So the profit is what, $600, right? Now what is the ROI here? The ROI is equal to 600 over 1500, right? That is, I think is around 40% if I'm not wrong. And this is without leverage. So in other words, what do I want to say with that? If you look at this trade, they will tell you that it's a great trade because you may 40%, ROI is 40%. But in reality you made 6% on your portfolio. And this is the money, in my opinion, this is the number that you should consider because ROI may be different according to the price of this. If, for example, this was at, let's say $20, if this was 20 and this was 18 and this was 24, then the ROI will be worse because your position will be like the investment will be higher. Why? Because the shares are more expensive. And as I said, if you use margin, for example, let's say you need 10% of this, so $150 only your ROI would have been 400%. Great. But you make again just 6% of your capital. So in other words, this ROI is not really something that will tell you how much money you make compared to how much you have is how much money you make compared to the amount of money that you have to invest. And the amount of money that you have to invest depends on the leverage you are using, depends on the price of the shares. So this must be very clear because when people are, in my opinion, giving you this kind of, oh, 200% ROI or things like that, they are kind of, I mean, they are not saying something that is wrong is true. But I think that many people will be attracted by the number thinking that this strategy can help me make 200% of my capital. But that's not true. You can make 200% on your capital, but this ROI is not a good indication. What you should look for is this. For example, the return that you can make with the strategy in terms of your portfolio, how many R can you make with the strategy and what is the winning percentage? And then according to how many trades you take. You can have an idea of how much you can make by just using the ROI or thinking that these numbers can tell you how much you will make in your portfolio is not the best thing to do. So that's all with this video. I just wanted to clarify these things. I hope it's not confusing. If it's confusing, you can let me know. I can explain you better. But the main message to take home is be careful that ROI and the return of your portfolio are not the same thing. ROI depends on the amount of money that you put. And this can be kind of manipulated if you use leverage. And also it depends on the price of the share if it's more expensive or less expensive. And this may be a cause for a difference in roi, even though you're making the same in terms of return on your portfolio. So with that, I would like to thank you for watching and see you next time.
