What Is a Capital Gain?
A capital gain generally refers to an increase in the value of an asset compared with its purchase price. A gain may become relevant when an investor sells or disposes of that asset.
Assets that may experience changes in value can include shares, mutual funds, exchange-traded funds, property and other investments.
Suppose an investment is purchased for 100 and later sold for 130. Ignoring transaction costs, taxes and other factors, the difference of 30 represents a gain.
What Is a Capital Loss?
A capital loss generally occurs when an asset is sold for less than its purchase price, subject to applicable calculations and transaction costs.
Investment values can move in either direction. A higher purchase price does not guarantee that an asset can later be sold at a profit.
Realised vs Unrealised Gains
An important distinction in investing is between a change in market value and a gain that has been realised through a transaction.
- Unrealised gain: The asset has increased in market value, but the investor has not yet sold it.
- Realised gain: A gain associated with a completed sale or other transaction.
The exact definitions and treatment may vary depending on the investment, jurisdiction and applicable rules.
Why Does Purchase Price Matter?
The purchase price, together with factors such as transaction costs, can help determine whether an investment has produced a gain or loss when it is sold.
Investors may also consider additional factors such as dividends, distributions, fees, inflation and taxes when evaluating the overall outcome of an investment.
Capital Gains and Long-Term Investing
Investors with long-term goals may focus on the total return of an investment rather than only short-term price movements.
However, long-term investing does not guarantee positive returns. Markets and individual investments can decline, and losses are possible.
Important Things to Remember
- Investment values can rise or fall.
- A gain is not guaranteed before or after an investment is sold.
- Transaction costs can affect investment results.
- Taxes and reporting requirements can vary by jurisdiction.
- Past performance does not guarantee future results.
- Individual financial decisions should consider goals, risk and personal circumstances.