Calculate Capital Gains Yield

How to Calculate Capital Gains Yield

Calculating capital gains yield (CGY) involves assessing the price appreciation of a security over a period of time. It's a key metric for investors to understand the success of their investment in percentage terms.

Required Data for Calculation

To perform the calculation, you need the original purchase price and the current market price of the security. These figures allow you to determine how much the price has appreciated since purchase.

Calculation Formula

Use the formula CGY = ((Current Price - Original Price) / Original Price) * 100. This formula subtracts the original price from the current price to find the gain, then divides this by the original price, and finally multiplies by 100 to express the result as a percentage.

Example of Calculation

For instance, if an investor bought a share at $100 and its current market price is $150, the capital gains yield is calculated as follows: (150 - 100) / 100 * 100 = 50%. This indicates a 50% increase in the value of the investment.

Understanding CGY helps investors gauge the direct profit potential of their shares excluding dividends, providing a clear picture of market performance and investment decisions. This measure is essential for comparing the growth rates of different securities or portfolios.

How to Calculate Capital Gains Yield

Capital Gains Yield (CGY) measures the price appreciation of an investment or security, presented as a percentage. Understanding and calculating CGY allows investors to assess the growth aspect of their investment without considering dividends.

Understanding the Formula

The capital gains yield formula is given by CGY = (Current Price – Original Price) / Original Price x 100. Here, 'Current Price' represents the market value of the security at present, and 'Original Price' is what you originally paid for the security.

Steps to Calculate CGY

To calculate CGY, follow these succinct steps:

1. Subtract the Original Price from the Current Price.
2. Divide the result by the Original Price.
3. Multiply by 100 to express the result as a percentage.

Example of CGY Calculation

Consider an example where an investor buys a share at $100 (Original Price) and the price rises to $150 (Current Price). The CGY calculation would be (150 - 100) / 100 x 100 = 50%, indicating a 50% appreciation in the value of the share.

By following these direct instructions, you can easily compute the capital gains yield to gauge the performance of your investments in terms of price appreciation.

Calculating Capital Gains Yield: Practical Examples

Understanding how to calculate the capital gains yield (CGY) can be crucial for investors wanting to assess the performance of their stock investments excluding dividends.

Example 1: Simple Capital Gains Yield Calculation

An investor buys a stock at $150 and sells it later for $180. The CGY can be calculated using the formula CGY = (Selling Price - Purchase Price) / Purchase Price. Here, it would be (180 - 150) / 150 = 20%. This represents a 20% increase in the value of the stock.

Example 2: Annualized Capital Gains Yield

If the above stock was held for two years, the annualized CGY must be calculated. Divide the total CGY by the holding period: 20% / 2 years = 10% per year. This shows a steady yearly increase in stock valuation.

Example 3: CGY with Decreased Stock Value

Consider a stock bought for $200 but sold for $180. The CGY calculation is (180 - 200) / 200 = -10%. This negative CGY indicates a loss in the value of the investment by 10%.

Example 4: Multiple Transactions

A series of buy and sell actions: Purchased at $100, sold at $120, repurchased at $110, and finally sold at $130. Calculate CGY for each transaction ((120 - 100) / 100 = 20% and (130 - 110) / 110 = 18.18%) and consider the average or total effect depending on investment strategy.

Example 5: Comparing CGY with Overall Return

Lastly, it’s informative to compare CGY with total returns incorporating dividends. If the initial stock from Example 1 also paid a $5 dividend, total return would be different, though CGY remains the same, clearly differentiating the effects of price appreciation and income received.

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