This calculator allows you to quickly discover the current value of your investment and how much it has grown because of the price increase. You will need to know your capital gains yield (CGY) when you want to analyze return on investment (ROI).
So, what can you learn from this article? Today, we’re going to throw some light on capital gains yield. In addition to learning how it’s calculated and used in real life, you will also find out about things linked to capital gains yield. This can be very helpful to investors looking to increase their investment return in the future.
What’s Capital Gains Yield?
Capital gains yield represents the increase in the security price (like common stock) while measuring return on investment. To calculate CGY, you need to divide the increase in the stock price by the initial security price when it comes to common stock holdings. The calculation is pretty simple because there are only two components required, including:
- The current price of a stock or bond, and
- The original price of a stock/bond
So, no investment income is included in this concept. Let’s say you want to start investing in stocks. If so, there will be two ways to get returns: dividends returns and price appreciation. Thus, your ROI is calculated this way: Return = dividends returns + price appreciation
With that being said, the CGY is actually the return that is only achieved from the appreciation of stock price. Now that you know what capital gains yield is, let’s see how it’s calculated.
CGY Formula
CGY = (Final Price – Initial Price)/Initial Price
For example, if the initial price of the stock is $1,000 while the final price after the first period is $1,200, then capital gains yield will be calculated as follows: CGY = (1,200 – 1,000) / 1,000 = 200 / 1,000 = 0.2.
It looks simple, right? Well, not quite. You will have to go through four steps when calculating your capital gains yield:
- Step 1: Determining the purchase price
- Step 2: Determining the current price
- Step 3: Calculating capital gains on an investment
- Step 4: Calculating capital gains yield
Don’t worry. We will break this calculation down for you to help you understand how it works in reality. So, let’s explain it – step by step.
Determining the purchase price
First, you need to know the original price when investing in something. Let’s assume you’re a stock investor who purchased a share for $1,000 a year ago. This is the bought or initial price of the investment.
Determining the current price
Next, you should consider the current price. If the investment is worth $1,200 today, then the current price will be 1,200 dollars.
Calculating capital gains on an investment
After determining the current and initial price of the investment, the capital gains can easily be calculated using this simple equation: Capital gains=current market price-original purchase price. That would be $200 in our case ($1,200 – $1,000 = $200).
Calculating capital gains yield
At last, you can calculate CGY using this formula: Capital gains yield (CGY) = capital gains/bought price
In our example, it is 0.2 (200 / 1,000 = 0.2). If you want to express CGY as a percentage, then you need to multiply it by 100, so it will be 20%.
Things to Consider When Calculating Capital Gains Yield (CGY)
- Note that the CGY calculation is identical for stocks and bonds. Either way, you should divide the price increase by the bought (original) price of your investment to get the capital gains yield.
- The capital gains yield is hard to predict. Sometimes it occurs monthly, but it may also occur once a year or every 3 months.
- Dividends are not included in the evaluation of CGY. Nevertheless, they can make up a substantial part of your total return compared to your capital gains. This depends on the stock.
- As an investment, you will not be able to generate capital gains yield if the original bought price is higher than the share price.
- Keep in mind that you may be required to pay capital gains taxes. The good news is that the taxes can be carried over into the next year. As an investor, you will also be capable of offsetting losses against income.
What Are the Benefits of Determining CGY?
A better understanding of the investment volatility
If the CGY tends to rise and fall irregularly in a relatively brief length of time, this usually means that the investment volatility is high.
A better understanding of all the elements of investment returns
This also helps investors find out where their returns are coming from. Most investors value dividend returns because of their lower tax rates and higher stability. Return on investment (ROI) makes it easier for them to adjust their portfolio as needed.
A better understanding of what amount of tax should be paid
Generally speaking, dividend returns and capital gains tax rates are not the same. Dividend returns usually pose a lower tax rate than capital gains. By calculating CGY for stocks, investors can determine how much tax should be paid on their investments.
FAQs
What’s the Difference Between Holding Period Return and Capital Gains Yield?
Holding period return illustrates income plus appreciation (the total return you have earned on your investment) during the investment period. Capital gains yield, on the other hand, doesn’t include any investment incomes (neither dividends nor interest).
What’s the Difference Between a Bond’s Current Yield and Capital Gains Yield?
These financial terms are often confused for one another. When it comes to bonds, you need to divide your annual interest income by the current price to calculate the current yield. So, it represents your income. Capital gains yield is a measure of capital appreciation.
How CGY is Calculated for a Bond?
Whether you want to calculate capital gains yield for a stock or a bond, the principle is the same. It’s necessary to divide the price increase by the original purchased price. For example, if you’ve bought a bond for $1,000 and it later increases to $1300, the CGY is 30%.