What is capital appreciation?
Investment capital may either grow or decline. If it is the first option, that investment’s market price increase is called “capital appreciation.” As the name suggests, capital appreciation refers to the difference between the investment’s purchase and selling price.
Let us explain this further. Let us assume that you bought a stock at $50. We call this $50 a cost basis or purchase price. Later on, the stock you purchased rose to $55. You earned $5 because of the capital appreciation. If you decide to sell it, that $5 is now called “capital gain.” Various markets and asset classes aim for capital appreciation, and these include real estate, mutual funds, exchange-traded funds, commodities, stocks, and more.
As for taxes, there will be no taxes until the investment’s sale. There will be no tax until the gain is realized and it becomes a capital gain. Capital gain tax rates are different depending on the investment. Is it a short- or long-term holding?
When and how does capital appreciation happen?
Many factors contribute to capital appreciation. One reason includes a company growing faster than other competing companies in a similar industry. It may also be because that company is growing faster than any market participant or analyst has expected.
The economy also creates a massive impact on capital appreciation. How? If the economy is growing fast and robust, loan growth will also be rapid and make the country prosperous. The Federal Reserve Policy also has a similar effect. For example, lower interest rates also stimulate loan growth.
Let us head on to a real estate point of view. Let us say that we have two real estate properties. One is located where the school, market, mall, and retail shops are nearby, and the other is located further from the civilization. Which among the two do you think is more expensive? In this case, we can say that a more robust economy and civilization are also significant factors in capital appreciation. If more developments such as malls, shopping centers, and hospitals were built in the area where there is less development, don’t you think that real estate property value will increase? That is what we also thought. Also, when there is a strong economy, more people will have stable jobs and can afford to have real estate properties and houses.
Why do entities invest in capital appreciation?
There are assets like government bonds and stocks that pay dividends meant for capital preservation and income generation. And then, there are investments such as mutual funds that aim for capital appreciation. There is nothing wrong with them. It’s just that these investments pose more significant risks. These funds purposely seek investments that will eventually rise in value depending on the increased earnings and other fundamental factors.
Who is perfect for this?
If you are a risk-taker regarding investments, you might want to try capital appreciation funds. Others consider growth funds as capital appreciation funds because they invest in company stocks that are growing fast. We understand that capital appreciation is also an investment strategy that risk-taking investors use to fulfill their financial goals.