Capital Gains Yield (CGY) measures the gains or losses an investor earns on a financial instrument over time. The formula for CGY is (P1-P0)/P0, where P0 is the original price and P1 is the current or selling price. CGY does not represent total return or cash flows, but can help investors determine price fluctuation.
Capital Gains Yield (CGY) refers to the gains or losses an investor earns on a financial instrument that appreciates or falls in price over the time the investor owns it. In other words, CGY indicates the rate of change of the price of the financial instrument. Many investors choose to calculate the CGY of an investment tool because the formula generally gives a good indication of how much the price of the tool fluctuates; This helps the investor determine which tools are good investment options. The capital gains yield is commonly expressed as a percentage.
CGY calculation
The formula for calculating the return on capital gains is: CGY = (P1 – P0) / P0. P0 represents the original price of the financial instrument, while P1 represents the current price or the selling price of the instrument. For example, if an investor buys a stock for $10 US dollars (USD) and then sells it for $15 dollars, the capital gains yield would be (15-10) / 10 = 5/10, or 50 percent.
There are other ways to express the CGY formula. It can be stated as (P) / P0, where P represents the change in price. A rearrangement of the original formula gives (P1 / P0) – 1.
The return on capital gains is not cumulative, so if the returns are known over multiple time periods, it is not possible to find the return for the entire period simply by adding up all the returns from the different periods. For example, there is no way to determine the annual return on capital gains simply by adding all the monthly returns for the year. Instead, the starting price at the beginning of the year and the price at the end of the year must first be known and plugged into the CGY formula to find the annual yield.
Other factors not included
The capital gains yield does not represent the total return of an investment, nor does it take into account cash flows, such as dividends. As a result, a financial instrument that has a negative CGY could still generate profit for the investor. The capital gains yield only equals the total return if the financial instrument does not generate cash flow.
For example, if an investor originally paid $60 for a share and later sold it for $58, their CGY would be negative: (58-60) / 60 = -3.33 percent. However, if he earns a $5 dividend during his holding period, he could still show an overall profit of $3.
Even though some factors are excluded from the formula, CGY can still be a beneficial formula for investors trying to calculate price fluctuation over a period of time.
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