Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksEasy
A client invested $10,000 in a growth stock that paid no dividends. After one year, the stock's market value increased to $11,500. The client then sold the stock. What is the client's capital gain from this investment?
- A$1,500
- B$1,000
- C$10,000
- D$11,500
Show answer & explanationAnswer & explanation
Correct answer: A. $1,500
A capital gain is the profit realized from the sale of a capital asset, calculated as the selling price minus the purchase price. In this case, the selling price was $11,500 and the purchase price was $10,000, resulting in a capital gain of $1,500.
Why the other options are wrong
- B. This would be the gain if the stock sold for $11,000.
- C. This is the original investment (cost basis), not the gain.
- D. This is the selling price, not the gain.
Capital Gain
The profit realized from the sale of a capital asset (like stock) when the selling price exceeds the purchase price (cost basis).
- Calculated as Selling Price - Purchase Price.
- Can be short-term (<= 1 year) or long-term (> 1 year).
- Subject to taxation.
Memory trick: Capital Gains are the Cash Gains from selling an Asset.