Investors can use a variety of methods to determine the profitability of their investments.
Regularly assessing your portfolio’s performance is important to ensure your investment capital is working as efficiently as possible. It can also help investors make more informed investment decisions about where to put their investment capital to work.
Capital gains yield is an important metric for measuring the total yield of a particular investment. Below we’ll outline the formula for calculating capital gains yield (CGY) and provide an example to help investors better understand how to determine the CGY of their own investments.
Investors can use the capital gains yield financial modeling formula to determine the amount of profit they’ll receive when selling a security for more than its original purchase price. CGY, therefore, is the spread between a security’s selling price and its original purchase price.
Investors can use CGY numbers as a gauge to determine the potential returns that might be generated on an appreciated investment. A higher capital gains yield number means more profitability for the investor.
CGY is determined by dividing a security’s capital gains by its purchase price. Here’s the mathematical formula:
P1 – P0 / P0
In this rate-of-change formula, P1 equals the security’s current market price, while P0 is the security’s original purchase price.
Here’s an example of the capital gains yield formula:
In October of 2017, a large tech company traded at $81.81 per share. Five years later the company traded at $242.26 per share. The company’s capital gains yield in that time frame was 196 percent. ($242.26-$81.81 = $160.45/$81.81).
Here’s another:
An electric vehicle manufacturer traded at $206.41 in late October of 2022. On the same day of October of 2021, however, it traded at $298.50 per share. This rate of change leads to a capital loss, or negative CGY of -30 percent ($206.41-$298.50=-$92.09/$298.50).
As you can see, there are a number of different factors that can affect capital gains yield, including:
As you can tell from the second example, an investment will yield negative CGY if the current market price is below your original purchase price. Capital gains yield varies from current yield because CGY doesn’t factor in any dividend payments; current yield accounts for the dividend income component. For investors seeking investments that may appreciate over time, CGY is an important metric. Similarly, investors seeking investments that generate income through regular dividend payments will focus more on yield metrics.
Accurately determining a security’s capital gains yield can help investors make more informed investment decisions because it provides a measure of the security’s price fluctuations over time. Calculating how much an investment has appreciated in value is a performance indicator that can be used in an attempt to strengthen or diversify your investment portfolio.
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.
Hypothetical examples shown are for illustrative purposes only.