Successful investing often requires a host of well-rounded skills, and they are ever-changing. The ability to gather knowledge and perform robust fundamental analysis on prospective investments doesn’t require any particular set of skills, though – yet these tools can help you better understand key metrics such as risk, return, and yield while forming stronger investment strategies.
In financial analysis, investors often calculate capital gains yield and growth rate to determine movements or changes in price or value over time. Let’s take a closer look at both since there are some subtle differences between growth rate and capital gains yield.
What is Capital Gains Yield?
Capital Gains Yield, or CGY, shows the value of an investment over a period of time so investors can determine performance and if the value of the investment has risen or fallen. Capital gains yield also helps investors determine if returns are being generated from appreciation or dividends.
CGY is a measure of an investment’s profit. For companies that don’t pay dividends, capital gains yield is one measure available to calculate return on investment. It’s best used as a means to calculate price increases or decreases of an investment over time – positive changes can have tax consequences. Capital gains yield also doesn’t take into account any income that was generated from the investment, such as dividend payments, which may make up a large portion of an investment's total returns.
What is Growth Rate?
Growth rate is typically expressed as a percentage that represents the change in an investment over a set time frame. Growth rate has long been used to express gains in population, but it also can be important for investors since it shows an investment’s annualized rate of growth.
Compounded annual growth rate (CAGR) is a measure of an investment’s performance over a specific period of time. It’s an important metric because it can help investors determine how much compounded yield they can expect an investment to generate annually, which gives an indication of what their total return will be at the end of the investment’s holding period.
CAGR does not take into account investment risk or volatility, which are important considerations when researching investments. The compounded annual growth rate is typically considered a better metric to use versus growth rate when looking at investments since CAGR accounts for the compounding effect. Growth rate, meanwhile, only takes into account an investment's change in value over a specific time.
Putting it all Together
Growth rate and capital gains yield are important financial metrics investors use to determine if investments are successful. Capital gains yield is a measure of an investment’s profit, but it has some limitations. Growth rate, on the other hand, is a measure of an investment’s performance over time that’s expressed as a percentage. Investors who know how to calculate both metrics are better positioned to make more informed investment decisions and know if their investment choices have been successful.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
