Tuesday, December 28, 2010

Capital Gains

A capital gain arises when an investor sells an asset for a higher price than they bought it. Capital gains can be short term in nature - arising from market timing and trading, or long term in nature - arising from a long time holding in e.g. a growth company or a value stock. In terms of mutual funds, a mutual fund does not itself pay income taxes, but rather, distributes the fund's net income (i.e. dividends, interest, less expenses) and net capital gains form during the year to investors. Investors themselves are then responsible to pay tax on that income. Funds will usually hold a certain portion of assets in cash to allow for making such distributions. The opposite of a capital gain is a capital loss, where the investor sells the asset for less than what they paid.

Synonyms: Capital gain, Capital gain distribution, Capital return, Price appreciation, Capital growth

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