1.10. How Money Is Made and Lost
Lesson objective
Understand appreciation, dividends, and capital loss.
A capital gain occurs when an investment is sold above its cost. Before it is sold, the difference is usually called an unrealized gain. Selling below cost creates a realized loss.
Dividends are distributions that some companies make to shareholders. They are not guaranteed and may be reduced or eliminated. A stock's price may also fall by more than the amount received in dividends.
In extreme cases, a company can fail and common shares may lose most or all of their value. Research should therefore consider financial strength as well as growth potential.
Simple example
You buy for $100, receive $2 in dividends, and sell for $95. The gross result is a $3 loss before taxes and costs.
The pieces of total return
Total return = (Ending value − Beginning value + Cash distributions) ÷ Beginning value
Worked example
You invest $1,000. A year later the position is worth $1,080 and you received $20 in dividends. Ignoring taxes and fees, total return = ($1,080 − $1,000 + $20) ÷ $1,000 = 10%.
| Type | Meaning | |---|---| | Unrealized | Price change while still held | | Realized | Gain/loss after sale | | Income | Dividends or other distributions |
Good company results do not guarantee a positive stock return because market prices reflect expectations.
Essential terms
| Term | Practical meaning | |---|---| | Cost basis | The amount used to calculate a gain or loss. | | Unrealized gain | An increase in value that has not yet been converted to cash through a sale. | | Dividend | A distribution of company resources to shareholders. |
In Finzati
Company Snapshot shows Dividend Yield, but sustainability requires reviewing earnings, cash flow, and debt.
What you should remember
- Total return combines price movement and distributions.
- A high dividend yield may accompany a price decline or elevated risk.
Practice
Calculate total return using a beginning price, ending price, and dividends.