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What is a Capital Gains Yield?
Capital gains yield (CGY) refers to the profits or losses an investor earns on a financial instrument that appreciates or depreciates in price during the time the investor possesses it. In other words, CGY indicates the rate of change of the price of the financial instrument. Many investors choose to calculate the CGY of an investment tool because the formula usually gives a good indication of how much the price of the tool fluctuates; this helps the investor determine which tools are good investment choices. Capital gains yield is commonly expressed as a percentage.
Calculating CGY
The formula to calculate capital gains yield is: CGY = (P1 - P0) / P0. P0 represents the original price of the financial instrument, while P1 stands for the current price or selling price of the instrument. For example, if an investor buys a share for $10 US Dollars (USD) and later sells it for $15 USD, the capital gains yield would be (15 - 10) / 10 = 5/10 or 50 percent.
There are other ways to express the CGY formula. It can be stated as (ΔP) / P0, where ΔP represents the change in price. A rearrangement of the original formula gives (P1 / P0) - 1.
Capital gains yield is not cumulative, so if the yields for several periods of time are known, it is not possible to find the yield for the entire period just by adding all the yields of the different periods. For example, there is no way to determine the annual capital gains yield just by adding all the monthly yields for the year. Instead, the initial price at the beginning of the year and the price at the end of the year must first be known and plugged into the CGY formula to find the annual yield.
Other Factors Not Included
Capital gains yield does not represent the total return of an investment, nor does it take into account cash flows such as dividends. As a result, a financial instrument that has a negative CGY could still generate profits for the investor. Capital gains yield only equals total return if the financial instrument generates no cash flow.
For example, if an investor originally pays $60 USD for a share and later sells it for $58 USD, his CGY would be negative: (58 - 60) / 60 = -3.33 percent. If he gets a $5 USD dividend during his holding period, though, he would still be able to show an overall profit of $3 USD.
Despite some factors being excluded from the formula, CGY can still be a beneficial formula for investors trying to calculate price fluctuation over a period of time.
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![CGY usually gives a good indication of how much the price of the tool fluctuates; this helps the investor determine which tools are good investment choices.]()
By: KurhanCGY usually gives a good indication of how much the price of the tool fluctuates; this helps the investor determine which tools are good investment choices.
Discussion Comments
Almost every stock I own is a dividend paying stock, so when I am looking at an expected capital gains yield formula, I know it doesn't take into consideration any dividends I have received.
Receiving a quarterly dividend check is a nice way to have some extra income coming in. I am also more of a buy and hold type of investor, so the capital gains yield is something I don't look at all that often.
When I get ready to sell a stock, I will determine what my capital gains yield will be, but feel a lot more comfortable just holding on to the stock and receiving the dividend.
I never knew how to calculate capital gains yield, but just look at it every quarter when I get a statement showing how my investments are performing. When I have my taxes done, they also need to know what the capital gains yield on any investments I have sold during the year.
One thing I look at when determining when to sell a profitable investment or not is the capital gains yield. I also take into consideration how long I have had the investment.
If this is something I have had for less than year, this would be taxed as a short term capital gain. If it is longer than a year, it would be a long term capital gain, and the taxes would be lower.
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