What are capital gains?

Capital gains refer to the profits that an investor realizes when an asset is sold for a price that exceeds its original purchase price. This concept is foundational in investment practice, as it illustrates how investors can grow their wealth over time. When an investor buys an asset—such as stocks, real estate, or other investments—and later sells it at a higher price, the difference between the selling price and the buying price is categorized as a capital gain.

This is a significant aspect of investment strategy, as many investors aim for capital appreciation as a primary source of return on their investments. Understanding capital gains helps investors assess the performance of their investments and plan tax implications, since capital gains are often subject to taxation depending on how long the asset was held and the specific tax laws in place.

The other choices do not describe capital gains. Losses from the sale of an asset represent a capital loss, income from dividends pertains to earnings distributed by a corporation to its shareholders, and funds raised from an initial public offering involve the process by which a company launches its shares on the market for the first time, none of which align with the definition of capital gains.