To understand capital recovery, we must first understand capital loss.
What Is Capital Loss?
A capital loss is when the selling price of a stock or investment is lower than the original purchasing price, ultimately resulting in a financial loss.
Warren Buffett once lost $400 million in a poor investment with Dexter Shoes. He then paid for that investment with his stock in Berkshire's, compounding it into a $3.5 billion error.
The point is, no matter how great of an investor you are, losses happen.
Capital losses are something every investor will eventually come across. No one opens an investment expecting it to fail. Losses will come, and they will come at the worst times. This is why it's important to understand capital recovery.
So What Is Capital Recovery?
Capital recovery is when your original capital investment is returned to you at some point during your investment's lifespan.
Let's say you invest $10 in your neighbor's lemonade stand. The $10 is your original capital investment.
You withdraw your investment, but when you withdraw it, it's only worth $5. The $5 you lost from your original capital is your 'capital loss'.
What if you closed the investment with $10? You now have a capital recovery, meaning that you closed with the amount you started with.
Lastly, what if you closed the investment with $15? In this case, you've earned $5 from your original starting capital. This is what we call a capital gain.