How is capital gain defined?

How is capital gain defined?

• A. The decrease in the value of an investment over time
• B. The profit realized when an asset is sold
• C. The total return on an investment
• D. The cash flow generated by an investment

Answer: (B)

Capital gain is defined as the profit realized when an asset is sold for a higher price than its original purchase price. This profit represents the increase in value that the asset has accrued over time. For example, if an investor buys a stock for $100 and later sells it for $150, the capital gain is $50. This is a crucial concept in investing and taxation, as capital gains can be subject to taxes when realized. Understanding capital gains is essential for investors, as it helps them assess the performance of their investments. The other options relate to different financial concepts; for instance, a decrease in the value of an investment refers to a capital loss, not a gain. Total return encompasses both capital gains and income generated by the investment, while cash flow refers specifically to the money that is generated by the investment, such as dividends or interest, rather than its change in value over time.

Capital gain is defined as the profit realized when an asset is sold for a higher price than its original purchase price. This profit represents the increase in value that the asset has accrued over time. For example, if an investor buys a stock for $100 and later sells it for $150, the capital gain is $50. This is a crucial concept in investing and taxation, as capital gains can be subject to taxes when realized.

Understanding capital gains is essential for investors, as it helps them assess the performance of their investments. The other options relate to different financial concepts; for instance, a decrease in the value of an investment refers to a capital loss, not a gain. Total return encompasses both capital gains and income generated by the investment, while cash flow refers specifically to the money that is generated by the investment, such as dividends or interest, rather than its change in value over time.