What does "capital gain" refer to?

Capital gain refers to the increase in the value of an asset or investment over time. When an asset is sold for more than its purchase price, the difference is recognized as a capital gain. This concept is important in finance as it reflects how investments can appreciate, contributing to wealth creation for investors.

For instance, if you buy stocks or real estate and their value appreciates, any profit realized upon selling them constitutes a capital gain. This appreciation can result from various factors, such as market conditions, improved performance of the asset, or economic growth. Understanding capital gains is crucial for investors, as it influences their investment strategies and tax liabilities.

In contrast to other options, the decrease in asset value would indicate a capital loss, while dividends relate to the income generated from investments rather than their price appreciation. The total return on a mutual fund investment would include both capital gains and income from dividends, making it a broader term rather than a focused definition.