Payday, Loans, finances

If you buy an asset of any type, your gain (or loss) from that investment is called the return on your investment. This return will usually have two components. First, you may receive some cash directly while you own the investment. Second, the value of the asset you purchase may change. In this case, you have a capital gain or capital loss on your investment.1
To illustrate, suppose you purchased 100 shares of stock in Harley-Davidson on January 1. At that time, Harley was selling for $37 per share, so your 100 shares cost you $3,700. At the end of the year, you want to see how you did with your investment.
The first thing to consider is that over the year, a company may pay cash dividends to its shareholders. As a stockholder in Harley, you are a part owner of the company, and you are entitled to a portion of any money distributed. So, if Harley chooses to pay a dividend, you will receive some cash for every share you own. In addition to the dividend, the other part of your return is the capital gain or loss on the stock. This part arises from changes in the value of your investment.
At the beginning of the year, on January 1, the stock is selling for $37 per share, and, as we calculated above, your total outlay for 100 shares is $3,700. Over the year, Harley pays dividends of $1.85 per share. By the end of the year, then, you received dividend income of Dividend income = $1.85 × 100 = $185 Suppose that as of December 31, Harley was selling for $40.33, meaning that the value of your stock increased by $3.33 per share. Your 100 shares are now worth $4,033, so you have a capital gain of
Capital gain = ($40.33 – $37) × 100 = $333 On the other hand, if the price had dropped to, say, $34.78, you would have a capital loss of
Capital loss = ($34.78 – $37) × 100 = -$222 Notice that a capital loss is the same thing as a negative capital gain.
The total dollar return on your investment is the sum of the dividend and the capital gain: Total dollar return = Dividend income + Capital gain (or loss)
In our first example here, the total dollar return is thus given by Total dollar return = $185 + $333 = $518 Overall, between the dividends you received and the increase in the price of the stock, the value of your investment increased from $3,700 to $3,700 + $518 = $4,218. A common misconception often arises in this context. Suppose you hold on to your Harley-Davidson stock and don’t sell it at the end of the year. Should you still consider the capital gain as part of your return? Isn’t this only a “paper” gain and not really a cash gain if you don’t sell it?
The answer to the first question is a strong yes, and the answer to the second is an equally strong no. The capital gain is every bit as much a part of your return as the dividend, and you should certainly count it as part of your return. That you decide to keep the stock and don’t sell (you don’t “realize” the gain) is irrelevant because you could have converted it to cash if you had wanted to. Whether you choose to do so is up to you.
After all, if you insist on converting your gain to cash, you could always sell the stock and immediately reinvest by buying the stock back. There is no difference between doing this and just not selling (assuming, of course, that there are no transaction costs or tax consequences from selling the stock). Again, the point is that whether you actually cash out and buy pizzas (or whatever) or reinvest by not selling doesn’t affect the return you actually earn.

Even when there is public concern over the state of the economy, the market does not react in a similar way to all economic data. Some reports seem to be more important than others, and the market appears to focus on one report at a time. The most significant data seem to be unemployment and the Consumer Price Index (CP1). During a period of sustained low unemployment, as seen in 1997, even a modest increase will not cause much concern. A jump in the CPI, however, will always warn the market to expect a preemptive strike by the Fed, cutting off potential inflation by nudging rates up slightly. The Trade Balance report was particularly popular in the late 1980s when the deficit with japan seemed to be at the root of the U.S. deficit. Sagging U.S. exports and overconsumption of foreign-made products by Americans looked as though the U.S. work force could not compete in the world market.
Other reports can also attract the attention of traders, but may be more difficult to interpret. Durable goods, retail sales, budget, and tax legislation all directly affect the economy and prices; however, it is not always clear how to relate the changes in durable goods orders with price change, or how the latest news on tax law will contribute to the economic well-being. More important, it is difficult to assess how the government will manipulate interest rates in reaction to these data.