With this capital gains yield calculator, you can easily calculate how much your investment has risen due to the increase in price. Calculating capital gains yield is a very useful when analyzing your investment return.
In this article, we will explain what is capital gains yield and how to calculate capital gains yield. We also provide an example to help you understand the capital gains yield formula and how to apply it to real life. If you are an aspiring investor who would like to improve your investment return, this is an article that you do not want to miss!
What is capital gains yield?
Capital gains yield measures the price return on your investment. If you invest in the stock market, there are 2 ways that you can achieve returns, price appreciation and dividends returns. Hence, the return on your investment will be the sum of the two components, as we have shown in the equation below:
return = price appreciation + dividends returns
The capital gains yield is the return you achieve from price appreciation only. Calculating capital gains yield can tell you much your investment has risen due to price increase.
How to calculate capital gains yield on a stock?
Capital gains yield is a relatively simple metric to calculate (even simpler with the capital gains yield calculator). To calculate the capital gains yield, there are 4 steps you need to follow:
- Determine the bought price of your investment.
- Determine the current price of your investment.
- Calculate the capital gains of your investment.
- Calculate the capital gains yield.
To illustrate how to calculate capital gains yield, let's look at a hypothetical situation. Let's say you are a stock investor and you just bought a share for $100.
Determine the bought price of your investment
In this case, the
bought priceof your investment is $100.
Determine the current price of your investment
Fast forward 1 year - the investment you bought a year ago is now worth $120. So, the
current priceof your investment is $120.
Calculate the capital gains of your investment
After obtaining the
current priceof your investment, you can calculate the
capital gainsusing the equation below:
capital gains = current price - bought price
So, in our example,
capital gains = $120 - $100 = $20.
Calculate the capital gains yield
Now that you've calculated your
capital gains, it's finally time to use the capital gains yield formula:
capital gains yield = capital gains / bought price
In this instance, the
capital gains yield = $20 / $100 = 20%.
The benefits of calculating capital gains yield
By calculating capital gains yield, you can:
- Understand the amount of tax you have to pay on your investment
In general, the tax rates for capital gains and dividend returns are usually different. Capital gains normally pose a higher tax rate than dividend returns. Hence, it is important to understand how to calculate capital gains yield on the stock so you know the amount of tax you have to pay on your investment.
- Understand the components of your investment returns
Calculating the capital gains yield also helps you to understand where your returns come from. Dividend returns are normally more valued by most investors due to their stability and lower tax rate. By having a better understanding of the your investments' returns, you will be able to adjust your portfolio accordingly.
- Understand the volatility of your investment
The volatility of your investment can also be inferred by calculating and understanding the capital gains yield. If the capital gains yield of your investment fluctuates a lot in a short period of time, it might be due to the high volatility of your investment.
All in all, capital gains yield tax is a very handy tool when it comes to analyzing the returns of your investments. However, it is also to keep in mind that dividend returns can also contribute majorly to your return. Thus, it is important to take them into account as well.