Capital appreciation means a market price for a particular asset has increased in value. It occurs when an asset that was backed by an investor is worth a higher market price than what was initially paid by the investor for the same asset. Capital appreciation may refer to an increase in the value of stocks or bonds held by an investor, a higher value in property assets, and other raised revaluation of fixed assets.
In considering capital appreciation on a property or asset, the appreciated value covers the total market value of the asset, exceeding the cost basis or the original investment. Return on Investment (ROI) is calculated using two major sources: dividends or interest income and capital appreciation. Capital appreciation is the larger of the two in terms of the return. However, the entire return an investment generates is calculated by summing up both appreciation of capital and the dividend return or interest income.
Used in reference to stock valuation, capital appreciation refers to an investor’s objective to seek long term growth. Capital appreciation is growth in the principal investment without a constant rise in the current income the asset generates.
A capital appreciation fund is a fund with the primary goal of making capital grow. Therefore, its primary characteristic is investments in growth stock.
The capital appreciation fund contributes to raising the value of assets using investment in growth stocks. These types of funds have associated risks as a result of heavy investment into growth stocks. Capital appreciation funds are also known as “Aggressive Growth Funds”. These types of funds are therefore more appropriate for investors with a higher level of tolerance for risk.
Capital appreciation funds attempt to deliver value to shareholders using the method of investing in companies that with share prices that tend to increase. Capital appreciation or aggressive growth funds is pointedly different from a dividend or income fund, which targets investing in companies that pay out dividends to shareholders.
An interesting fact about capital appreciation fund is that the taxes charged on the returns are lower than on those charged on interest income.
Capital appreciates for a variety of reasons, and the reasons are different from one asset class or asset market to the other. However, the concept of capital appreciation is the same.
A broad trend of increase in the market can support investment prices. Other macroeconomic factors can cause appreciation such as an impressive growth in GDP. Also, capital appreciation can result from accommodative policies set out by the Federal Reserve that lower their benchmark rates.
Other times, a passive and gradual capital appreciation could occur even without any active participation by the investor. However, this type of return is separate from a capital gain which is as a result of the sale of an asset.
Stock prices could rise when a firm performs beyond the expectations of analysts. Investors with holdings in such firms would also experience an increase in their capital. A house or other property could experience an increase in real estate value as a result of appreciable proximity to imminent new developments such as good quality schools, big shopping centres or major roads.
Financial statements may or may not reflect capital appreciation. However, if it is shown, perhaps through a revaluation, then the asset is said to be “recognized”. In such a situation, any recognized capital appreciation recorded since the date when the investment in the asset was done, is a “realized” gain.
Growth funds and mutual funds seek to create appreciation in capital. Growth funds, also known as capital investment investments, put their funds into company stocks that experience rapid expansion and an increase in shareholder values at the same time. They make use of capital appreciation as their major strategy for investment in order to meet their investors’ expectations of lifestyle especially after retirement.
Mutual funds search for investments with the likelihood of enjoying an increase in value, either as a result of their solid fundamentals which are currently undervalued, or because they have earnings which perform beyond the expectations of analysts. Such investments however entail larger risks than the investment options picked for the purpose of income generation or capital preservation such as municipal bonds, government bonds or stocks that pay high dividends.
Capital appreciation in the context of mutual funds refers to an increase in the value of the securities in an investment portfolio that contributes to the rise in net asset value.
After an asset or investment gets sold, payable tax rates paid on capital appreciation depends on the length of time on the investment. A stock held for about a year is added to ordinary income and taxed at the same rate. However, if the duration is more than a year, lower long-term capital gains rates will be applied.
Until investment is liquidated, capital appreciation cannot be realized. The recognised gains from an investment remain in theory form until the assets on which capital has appreciated is actually sold. Therefore gains made on the investment are only in paper form and would be wiped off if the stock market experiences a crash. As a result of such risk, only gains are taxed by the Internal Revenue Service.
The total value of capital appreciation on an investment is limited to the increase in the value of the investment or asset. To calculate capital appreciation, the initial investment value is subtracted from the current value of the same. For example, say the shares of a particular stock currently cost £52 per share. An individual who purchased 100 shares of stock at £50 per share will calculate his capital appreciation by subtracting the initial price of £50 from the current price of the share at £52. The value of capital appreciation is £2 per share. The total capital appreciation for his entire shares is gotten by multiplying the per share increase of £2 by the number of stocks, i.e. 100. The total capital appreciation is therefore £200.
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