Investors can make capital
gains if the share value appreciates in the market. Growing companies offer
upside potential for attractive capital gains through increased earnings.
Capital gain can be computed
using the following formula:
Capital
gain %
=
Change in
share value
x
100
Cost of
initial investment
Or absolute capital gain can be
computed using the following formula:
Capital gain =
Sales value – purchase cost
Example: If you bought
100 shares of X Company at SR 80.00 each in January 2000, at the end of 2001 the
same company’s shares are trading at SR 96.00. This particular investment has
generated 20% capital gains:
Sold for (100 x 96)
SR 9,600
Purchase cost (100 x 80)
SR 8,000
Gain
SR 1,600
Gain as a %
1,600 ÷ 8,000 = 20%
Annual return (invested
for 2 years)
= 20% ÷ 2
= 10%
If you want to compare return
on two or more investments that you bought at different prices, you need to
figure out percentage return.
Example: 100 Y Company
shares were bought for SR 15.00 in January 2000 and were sold at SR 25.00 each
at the end of 2001.
Sold for (100 x 25)
SR 2,500
Purchase cost (100 x 15)
SR 1,500
Gain
SR 1,000
Gain as a %
1,000 ÷ 1,500 = 67%
Annual return (invested
for 2 years)
= 66.67% ÷ 2
= 33.33%
Now, you are in a better
position to compare the performance of X Company and Y Company.
X Ltd
Y Ltd
Total capital gain
1,600
1,000
Total return %
20%
66.67%
Annual return %
10%
33.33%
Stocks of Y Company have
performed more than three times compared to investment in X Company.
A real world
example from Saudi Stock Market – 2003
Please wait...
