Interest-bearing investments differ in how they produce returns because of their owners. When a trader sells a wise investment for more than they originally purchased it for, the main difference between those values is recognized as the capital gain. When you purchase a stock for $1,000 and subsequently flip it for $1,200, you are aware of a capital gain of $200. However, possibly you’ve also received periodic interest rates from the stock’s issuing company because you owned it. These interest rates are called dividends, as well as the treatment of dividend returns is extremely different than the treating capitals gains.
Dividends and capital gains are definitely the two wealth-building tools with the stock market; investments either boost in price through capital appreciation, or companies fork out a portion of their own profits to shareholders as dividends. Market shorthand for unrealized capital gains, meaning the asset have not yet been sold, will be the “return,” as you move the shorthand for dividends will be the “yield.”
Strictly speaking, dividends aren’t actually charges, because dividends actually damage stock values slightly whenever they are distributed. However, the stockholder receives that income immediately. Capital gains only result from your sale of a smart investment; every time a stock’s price rises from $100 to $105, you merely really gained the opportunity to sell for a 5% capital gain. If the price falls again to $98 before you sell, you don’t realize that 5% gain.
The tax rules for dividends and capital gains change frequently, though the IRS addresses every type of return differently. In fact, long-term capital gains, or assets held over one year, are treated differently than short-term capital gains. Short-term gains tend to be taxed similarly to dividend income.