What is the primary distinction between capital gains and dividends?

The primary distinction lies in the nature of capital gains and dividends. Capital gains refer to the increase in value or profit realized from the sale of an asset, such as stocks or real estate, when it is sold for more than its purchase price. This profit is only realized when the asset is sold, making capital gains a reflection of investment appreciation.

On the other hand, dividends are payments made to shareholders from a corporation's earnings. These payments are typically distributed regularly (e.g., quarterly) and represent a portion of the company's profits shared with its investors. Dividends are not linked to the selling of an asset, but rather to the ongoing profitability of a company and the decision of its board to return profits to shareholders.

Understanding this distinction is crucial when evaluating investment strategies, as capital gains and dividends constitute different sources of returns from investments. Capital gains can be seen as a more volatile income, varying with market conditions and the timing of buying and selling assets, whereas dividends offer a more stable, predictable form of income derived from an investment.