Dividends, capital gains and losses

In simple terms

When you own shares, money can come to you in two ways.

Dividends. When a company makes a profit, its board can decide to pay part of it out to shareholders in cash. This payment is a dividend, and every share receives the same amount. Many companies pay dividends once or twice a year; many others, especially young, fast-growing ones, pay none and reinvest their profits instead.

Capital gains. If you sell a share for more than you paid, the difference is a capital gain. If you sell for less, it is a capital loss.

Your total return combines both. It is the honest answer to the question "how did this investment do?"

Working it out

Dividend yield

The dividend yield compares a year's dividends with the current share price. It tells you how much cash income the share pays relative to what it costs today.

A share at ₹400 paying ₹10 a year has a dividend yield of 2.5%. Be careful: a very high yield can be a warning sign rather than a bargain. It often means the share price has fallen sharply because investors expect the dividend to be cut.

Realised and unrealised

A gain or loss is unrealised (or "on paper") while you still own the share. It becomes realised when you sell.

The distinction matters in two ways. First, an unrealised gain is not money in your pocket. If the price falls before you sell, the gain can shrink or vanish. Second, an unrealised loss is still a loss. Refusing to look at it, or telling yourself "I haven't lost until I sell", does not change what the shares are worth today.

Costs and taxes

Real returns are lower than the simple calculation above, because buying and selling involves costs. These include the broker's brokerage, exchange and regulatory charges, stamp duty and the securities transaction tax. Each is small on its own, but they add up quickly if you trade often.

Gains and dividends may also be taxed, and the rules depend on how long you held the shares and on current tax law. Tax rules change frequently, so check the current position with the Income Tax Department or a qualified tax adviser rather than relying on a figure you read once.

Why it matters

Thinking in total return keeps you honest. People often remember the share that doubled and forget the three that fell, or quote the price change and ignore the costs. Measuring the full return, including losses and charges, is the only way to know whether your decisions are actually working.

It also explains why companies that pay no dividend can still be good investments, and why a high dividend alone does not make a good one. What matters is the combination: cash paid out plus what happens to the value of the business.

Limitations

The total return formula above measures one holding over one period. It does not account for how long the money was invested: 15% in one year is far better than 15% over five years. Comparing investments of different lengths needs an annualised return, which is covered in the investing path.

It also ignores inflation. If prices in the shops rose 6% in the same year, a 15% return bought you about 9% more than before, not 15%.

Common mistakes

• Ignoring dividends. Over long periods, dividends can make up a meaningful part of the total return.
• Ignoring costs. Frequent buying and selling multiplies charges, which can turn a small gain into a loss.
• Treating a high dividend yield as free money. A falling price can raise the yield even as the business weakens, and dividends can be cut.
• Holding onto losers to avoid "making the loss real". The loss already exists. The real question is whether you would buy the share today at today's price.

Try it yourself

You buy 20 shares at ₹1,250. Over two years you receive dividends of ₹18 and ₹22 per share. You sell at ₹1,190. Brokerage and charges total ₹120.

1. What is your capital gain or loss?
2. What were your total dividends?
3. What is your total return in rupees and as a percentage, after costs?

Answers: 20 × (₹1,190 − ₹1,250) = −₹1,200; 20 × (₹18 + ₹22) = ₹800; −₹1,200 + ₹800 − ₹120 = −₹520, which is −₹520 ÷ ₹25,000 = −2.08%.