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| Capital Appreciation |
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A rise in the value of an asset based on a rise in market price. Essentially, the capital that was invested in the security has increased in value, and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis. Capital appreciation is one of the two main sources of investment returns, with the other being dividend or interest income.
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For example, say you purchase a share for $10, which pays a dividend of a $1 per share each year, and is now trading at $15 per share a year later. Your capital appreciation in the investment is $5, or 50%, as the price of the share has increased $5 over your purchase price or cost basis. Your interest income return is $1, or 10%, for a total return on the shares is $6 or 60%.
Capital appreciation is often a stated investment goal of many mutual funds. These funds look to find investments that will rise in value based on increased earnings or other fundamental metrics. Investments targeted for capital appreciation tend have more risk than assets chosen for capital preservation and income generation, such as government, municipal bonds, or dividend-paying stocks. Because of this, capital appreciation funds are considered appropriate for risk-tolerant investors.
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