What do capital gains distributions refer to?

Capital gains distributions specifically refer to the profits that are realized from the sale of securities, which are then distributed to shareholders. When mutual funds or investment companies sell securities within their portfolio at a profit, they are required to distribute those gains to their shareholders, typically on an annual basis. This practice allows investors to receive their share of the profits generated by the fund's investments.

Understanding capital gains distributions is important for investors because these distributions can have tax implications; they may increase the tax liability for shareholders even if they did not sell any shares themselves. This concept highlights the distinction between profits from asset sales (capital gains) and other forms of income, such as dividends or interest payments.