What are capital gains?

Capital gains refer to the profits realized when an asset, such as stocks, bonds, or real estate, is sold for a price that exceeds its original purchase price. This financial concept is essential for investors as it directly impacts their overall returns on investments. When an investor buys an asset and later sells it at a higher price, the difference between the selling price and the initial investment cost is recognized as a capital gain. This gain can be classified as either short-term or long-term, depending on how long the asset was held before the sale, which influences the tax treatment of the profit.

Understanding capital gains is crucial because they play a significant role in investment strategies and tax planning. Investors often aim to achieve capital gains as part of wealth accumulation and financial growth. This knowledge helps individuals make informed decisions regarding when to sell assets and how to evaluate their investment performance.