Capital gains yield definition
/What is Capital Gains Yield?
Capital gains yield (CGY) is the percentage price appreciation on an investment. It is calculated as the increase in the price of an investment, divided by its original acquisition cost. If the price of an investment falls below its purchase price, there is no capital gains yield.
This concept does not include any dividends received; it is only based on changes in the price of an investment. To calculate the total return on a share, an investor must combine the capital gains yield and the dividend yield.
Example of Capital Gains Yield
For example, if a security is purchased for $100 and later sold for $125, the capital gains yield is 25%. If the security were to also pay out a $5 dividend, this would have no impact on the measurement, since it excludes any income received from the investment.
Practical Applications of Capital Gain Yield
The practical applications of capital gain yield include the following:
Assessment of investment performance. Investors use CGY to measure the performance of stocks, as it reflects the percentage increase in the stock's price over time.
Comparison of investment options. CGY allows investors to compare the price growth potential of various assets, such as stocks, bonds, mutual funds, or real estate.
Portfolio management. CGY helps identify which investments have appreciated significantly and might need rebalancing to maintain a desired asset allocation.
Tax planning. Capital gains are often taxable, so understanding CGY can help in planning tax strategies, such as timing the sale of investments to minimize tax liability.
Investment decision-making. Historical CGY trends can help in forecasting future price movements and making informed decisions. Consistently high or volatile CGY might indicate higher risk, requiring a careful analysis of the investment's stability.
Strategic financial planning. Investors incorporate CGY into long-term financial goals, such as retirement planning or saving for a major purchase, as it provides insight into potential wealth accumulation.