Table Of Contents
Formula to Calculate Gain
An investor earns a gain or profit when they sell the instrument of economic value or asset at a price above the buying price of the asset. The buying price of the asset is the price at which the investment gains exclusive rights or ownership of the asset; when the asset sells, the price that the individual quotes is termed the selling price.
- Many investors determine capital gain yield knowing how fairly they gained from the investment. The gain can broadly classify as realized gains and unrealized gain. Unrealized gain is the gain that the investor is earning over and above the buying price of the asset, but the investor has yet to liquidate it or sell it.
- Realized gain, on the other hand, is the gain that the investor gets when it liquidates its position or sells the asset over and above the buying price. If we take a financial asset then gain on the selling the asset would be calculated as follows:
Gain Realized Formula = Selling Price – Buying Price.
Here,
Selling price > Buying price.
Explanation of Gain Formula
An asset's economic utility and condition help determine its fair market value in the market. The formula for gain can be calculated by using the following steps:
- Firstly, determine the type of asset an individual owns.
- Next, Access the nearest financial market where the identified asset is traded actively. Such markets offer absolute liquidity. Such markets where the same assets are bought and sold make it easier for the individual to determine the effective available value.
- Next, compare the market price of assets available from the financial markets. Then compare it with the buying price.
- Next, determine the cost of transactions that would come into the play if the investor decides to sell the asset.
- Next, if the available market value is more than the price on which the individual acquired an asset and covers the scope of transaction costs, then it should sell the asset at that price to arrive again from the financial asset.
Calculation Examples of Gain (with Excel Template)
Let’s see some simple to advanced examples of the gain formula to understand it better.
Example #1
Help the trader determine the gain earned from the financial transaction. Let us take the example of a trader who had bought 200 shares at a price level of $300. Currently, the stock trades at $430. The trader decides to liquidate its position at the price level of $430.
Solution:
Use the given data for the calculation of gain.
Assume that the transaction costs are zero.
Calculation of gain earned by the investor can be done as follows:
Gain Earned by Investor = $86000 - $60000
The gain Earned by Investor will be -
Gain Earned by Investor = $26,000
Therefore, the trader makes a gain of overall $26,000 over the entire transaction.
Example #2
Let us take the example of individuals who bought a house for $1,000,000. The individual plans to move out of their current location and settle in an offshore location. The property broker informed the individual that the house's current market value stands at $1,300,000. The individual decides to liquidate its position at the price level of $1,300,000.Help the individual determine the gain earned from the financial transaction.
Solution:
Use the given data for the calculation of gain.
Assume that the transaction costs are zero and have nil property tax.
Calculation of gain earned by the investor can be done as follows:
Gain Earned by Investor = $1,300,000 - $1,000,000
The gain Earned by Investor will be -
Gain Earned by Investor = $300,000
Therefore, the individual earns a gain of overall $300,000 over the entire transaction.
Example #3
The car looks brand new, and two buyers are keen to purchase the car. Let us take the example of a car seller who had bought an old car for $45,000. He spent an additional $70,000 to modify and refurbish the car.
Help the car seller determine the gain earned from the financial transaction.
Buyer 1 offers $155,000 as of buying the price, whereas buyer 2 offers $180,000. The seller eventually sold the car for $180,000.
Solution:
Use the given data for the calculation of gain.
Assume that the transaction costs are zero.
Calculation of gain earned by the investor can be done as follows:
Gain Earned by Investor = $180,000 - $115,000
The gain Earned by Investor will be -
Gain Earned by Investor = $65,000
Therefore, the car seller makes a gain of overall $65,000 over the entire transaction.
Gain Calculator
You can use this calculator.
Relevance and Uses
- The gains help determine how well the investment undertaken by the individual faired. If the investor held multiple investments wherein one investment resulted in a gain while other investments resulted in a loss. The investor's gain in one investment would then cover the loss made in the investment.
- The gains earned by the individuals are taxed as per the ordinary tax rate. In comparison, gains earned by the corporate entities would be taxed as per the corporate tax rate. However, when the gain is realized, there may be a probability that the asset value may rise further, and there would be a scenario of unrealized loss.
- Whenever an investor gains, he should record such transactions in the books of accounts. This helps in the accounting of actual realized gain and helps in the actual assessment of taxes as per the tax norms prescribed within the state and nation.
