The simplest way to calculate return on investments is the calculation of Holding Period of Return (HRP) which is the comparison of expected (or actual) investment value after some time to the initial value of your investment. However Effective Rate of Return is a better way to valuate investments.

Effective Rate of Return vs Holding Period of Return (HRP)

Definition: Effective Rate of Return takes into account not only the change of investment value but also time, which is crucial (in my opinion) because time is money. And dollar (euro) today is more than a dollar (euro) tomorrow.

Suppose you are making your investment of 100$ once in January and next January receive your 106$ which means that HPR is 6%.

BUT if you invest your money during the whole year in parts, for example, $8.33 each month. Although the sum of investments during the year is 100$ it is not the same as investing 100$ at once. Therefore it is more precise to use an ERR for calculations because it takes into account cash flow in time.
If you use HRP in both cases you get a result of 6% per year. If you calculate ERR in first situation it is 6% and in the second one it is 6.17%.

How is Effective Rate of Return (ERR) calculated?

In order to obtain effective rate of return you need to divide 0.06 (or 6%) by 12 (number of compounding periods, months) which is 0.005 and add 1. (equals to 1.005). In the second step you need to raise 1.005 to the power of 12.
The result is: 1.005^12=1.0617. ERR is equal to 0.617 or 6.17%.