Capital gains refer to the profit made from selling an asset, such as shares in a company, for more than its original purchase price. For shareholders, capital gains occur when the value of the shares they own increases, and they sell those shares at a higher price. For example, if a shareholder buys shares at $50 each and later sells them at $70, the $20 difference per share is the capital gain.

There are two types of capital gains: short-term and long-term. Short-term gains result from selling shares held for less than a year, while long-term gains apply to shares held for more than a year. In many tax systems, long-term capital gains are taxed at a lower rate than short-term gains, encouraging long-term investment.

Capital gains can significantly impact shareholders by increasing their overall returns. However, they are also subject to capital gains taxes, which shareholders must pay based on the tax regulations of their country. In many cases, shareholders may strategically hold or sell shares depending on potential tax liabilities. Additionally, capital gains are a key reason why investors seek growth stocks, as these shares have higher potential for price appreciation, leading to more significant capital gains over time.