Q:

How do I calculate capital gains yield?

A:

The capital gains yield of a stock can be calculated by dividing the change in price of the stock after the first period by the original price. Investopedia explains that the formula for this is (P1 - P0) / P0, where P1 equals the original price paid and P0 equals the price after the first period.

Capital gains yield is the appreciation of the stock over a certain period (which may be annual, monthly or quarterly), whereas dividends are determined by the company and paid out to shareholders during a certain period. For example, if Company X's stocks are purchased at $10 per share and they increase to $100 per share during the quarter, the capital gains yield formula would be 100 - 10 / 10 = 9, or 900 percent.

When the capital gains yield occurs over multiple periods, each period cannot be summed to generate a total capital gains yield. Instead, the investor must use the holding period return formula. This formula is HPR = [(1 + r1) * (1 + r2) * ... (1 + rx)] - 1, where r is the return per period and rx is the number of periods.

When investing in a stock, it is important to calculate the holding period return rate rather than simply looking at the capital gains yield or the dividend return rate, because it is possible that stocks with lower dividend returns held over shorter periods of time may provide a greater percentage of return on the investment.


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