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Lesson 4. What Is a Stock? > The Two Main Issues of Stock - Pg. 21

What Is a Stock? Plain English 21 Capital is the original amount you invested in your financial instrument. A capital gain is an appreciation of the value of the financial instrument, such as a stock, in which the initial principal was invested. If your stock is worth more now than what you paid for it, then you have realized a capital gain. If you had bought stock in one of those companies that makes Widgets from apples, the value of your company and subsequently its stock would have decreased because of the deep freeze that destroyed the apple crop. You would have suffered what's called a capital loss. Capital gains and losses are one of the two ways stock make and lose money (the other being dividends). In addition, however, other factors such as the taxes on capital gains should always be taken into consideration. Current capital gains taxes are so high as to often negate much of a stock's potential earnings and make many stocks unattractive to investors for that reason. As with any investment, you always run the risk of losing the initial money you invested (capital loss). While in such a case it would offer little if any consolation, you would, at least, receive a tax credit for the money you lost. When the Widget company makes money by selling all those Widgets, the owners of the stock get a proportional cut of the profits in the form of a dividend. The investor has the choice to take the dividend as a payment after paying taxes on the profit, or reinvesting it to buy more stock. Dividends are related to capital gains in that any company which is consistently making profits and paying them out in dividends will soon be discovered as a great company. For that reason, the value of the company would eventually rise and create a capital gain for its owner when he or she sells the stock. Preferred Stock