Business, Legal & Accounting Glossary
Capital appreciation is defined as any increase in the market price of a stock. Investors who are long the market derive their trading profits from the capital appreciation of the stocks they hold. Capital appreciation can stem from a number of factors: capital appreciation can result from a company’s actual increase in growth or profits, or capital appreciation can be a result of a company’s anticipated future prospects, or it can result from other factors. Day traders and other short-term traders who rely on daily market fluctuations (i.e. volatility) are generally not as interested in a company’s capital appreciation potential as is a long-term investor. Genuine long-term capital appreciation is rooted in a solid foundation of good management combined with a viable product as well as a number of other market factors.
A rise in the market price of an investment is referred to as capital appreciation. The difference between an investment’s purchase and selling prices is known as capital appreciation. If an investor buys a stock at $10 per share and it rises to $12, the investor has earned $2 in capital appreciation. When the investor sells the stock, the $2 profit is considered a capital gain.
The portion of an investment in which market price gains exceed the original investment’s purchase price or cost basis is referred to as capital appreciation. Capital appreciation can occur for a variety of reasons in various markets and asset classes. Some examples of financial assets that are invested in for capital appreciation are:
Capital appreciation is not taxed until an investment is sold and the gain is realised, at which point it becomes taxable. Capital gain tax rates differ depending on whether the investment was made for a short or long period of time.
Capital appreciation, however, is not the only source of investment returns. Dividends and interest income are two additional important sources of income for investors. Dividends are typically cash payments made by corporations to shareholders in exchange for investing in the corporation’s stock. Interest can be earned by holding interest-bearing bank accounts such as certificates of deposit. Bonds, which are debt instruments issued by governments and corporations, can also generate interest income. Bonds typically pay a fixed interest rate or a yield. Total return refers to the combination of capital appreciation and dividend or interest returns.
The value of assets can rise for a variety of reasons. Asset values can rise as a result of macroeconomic factors such as strong economic growth or Federal Reserve policy such as lowering interest rates, which stimulates loan growth and injects money into the economy.
On a more specific level, a stock price can rise because the underlying company is growing faster than competitors in its industry or at a faster rate than market participants anticipated. The value of real estate, such as a house, can rise due to proximity to new developments such as schools or shopping malls. Because people have stable jobs and incomes, a strong economy can lead to an increase in housing demand.
Many mutual funds have capital appreciation as a stated investment goal. These funds seek investments that will appreciate in value as a result of higher earnings or other fundamental metrics. Capital appreciation investments, such as government bonds, municipal bonds, or dividend-paying stocks, are riskier than assets chosen for capital preservation or income generation, such as government bonds, municipal bonds, or dividend-paying stocks. As a result, capital appreciation funds are thought to be best suited for risk-averse investors. Growth funds are commonly referred to as capital appreciation funds because they invest in the stocks of companies that are rapidly growing and increasing in value. Capital appreciation is used as an investment strategy to help investors meet their financial goals.
Capital appreciation bonds are municipal securities because they are backed by local government agencies. These bonds work by compounding interest until maturity, which is when the investor receives a lump sum that includes the value of the bond and the total accrued interest. Appreciation bonds are not the same as traditional bonds, which typically pay interest payments on a yearly basis.
An investor buys a stock for $10, and the stock pays a $1 annual dividend, resulting in a 10% dividend yield. A year later, the stock is worth $15 per share, and the investor received a $1 dividend. The investor received a $5 return from capital appreciation because the stock’s price increased from its purchase price or cost basis of $10 to its current market value of $15 per share. In percentage terms, the increase in stock price resulted in a 50% return on capital appreciation. The dividend income return is $1, equating to a 10% return on the original dividend yield. The return on capital appreciation combined with the dividend return results in a total return on the stock of $6, or 60%.
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This glossary post was last updated: 26th January, 2022 | 0 Views.