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Speaking Mathanese: Capital Gains

Welcome back to another edition of "Speaking Mathanese," our Motley Fool series that tackles financial math myths and deconstructs the computations that make the biggest difference to your bottom line.

This week, our quest to make you smarter than a fifth grader finds us draining a comforting cup of cost basis to take a crack at capital gains.

The myth
No questions this week. It's not that I didn't get any. My ever-expanding gut told me that you'd be better served with a follow-up from last week. Here's how I closed that column:

... Be sure to tune in next week, when we get into why it's important to know your cost basis cold.

Ooooooooooh, spooky.

Well, sort of. Cost basis is important because, without it, you couldn't calculate your total return, or your compound annual growth rate, or, most importantly, your capital gains.

Sounds like what the Democrats did during the 2006 elections, doesn't it? "Woo-hoo! We took back the House! It's a capital gain!"

The math
Maybe, but the investing type of capital gains comes with far less controversy. Here's how our friends at Investopedia define the term:

An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. [Emphasis mine.]

Still confused? No problem. Let's say you bought 1,000 shares of Crocodile Dundee Dingo Sausage (TICKER: WOOF) for $10 each. Let's also say that each share is worth $20 today. Your capital gain, were you to sell, would be $10,000.

Or, in mathanese:

Total investment value - cost basis               

Got it? Great. Let's see whether you can figure out the capital gain had you bought 100 shares of each of these stocks exactly one year ago and sold yesterday:

Company

Closing Price
6/26/06

Closing Price
6/26/07

Dividends Paid per Share

Amazon (NASDAQ:AMZN)

$36.77

$67.48

$0.00

Boeing (NYSE:BA)

$83.89

$94.98

$1.30

Microsoft (NASDAQ:MSFT)

$22.82

$29.52

$0.39

Procter & Gamble (NYSE:PG)

$55.99

$61.19

$1.28

Volcom (NASDAQ:VLCM)

$28.51

$46.43

$0.00

Source: Yahoo! Finance.

Look for the answers next week, when we break down the types of capital gains. (Yikes!)

Still have questions? Submit them here.

For more money ideas, get 30 days of free access to Motley Fool Green Light  right now. There's no obligation to subscribe.

Amazon is a Stock Advisor selection. Microsoft is an Inside Value recommendation. Volcom is a two-time Motley Fool Hidden Gems pick. Try out any Foolish newsletter service free for 30 days.

Fool contributor Tim Beyers writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on personal finance, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy is lobbying its local school district for a course in beginning mathanese.


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Tim Beyers
TMFMileHigh

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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9/19/2014 4:00 PM
AMZN $331.32 Up +6.32 +1.94%
Amazon.com CAPS Rating: ***
BA $129.35 Up +0.77 +0.60%
The Boeing Company CAPS Rating: ****
MSFT $47.52 Up +0.84 +1.80%
Microsoft CAPS Rating: ***
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