DEFINITION of 'Accumulation'

Accumulation has several definitions in the finance world:

  • It can refer to an individual investor's cash contributions toward building wealth over a period of time (often for retirement). Many investors go through an accumulation phase in order to create a portfolio of a desired value. During a period of accumulation, the investor often re-invests all dividends and capital gains
  • It can also cover an institutional investor's purchase of a large number of shares (i.e., taking a position) in a public company over an extended period of time.  
  • It can mean the retention of company profits for reinvestment in business operations (as opposed to the payout of earnings as dividends to shareholders).

BREAKING DOWN 'Accumulation'

In the first definition above, when an individual investor is attempting to build up the value of her portfolio, she is said to be accumulating wealth. Automatic reinvestment of profits over the course of the investment time horizon can significantly boost the pace of accumulation via the benefits of compounding.

For example, suppose an individual deposits $10,000 into an account that pays 6% annual interest. After the first year (compounding period), the total in the account has risen to $10,600. In the second year, the account realizes 6% growth on both the original principal and the $600 of first-year interest, resulting in a second-year gain of $636 and a balance of $11,236. After 10 years, assuming no withdrawals and a steady 6% interest rate, the account would grow to $17,908.48.

In the second definition above, large investors and financial institutions are limited in their ability to move in and out of securities, because they deal with a large volume of shares that has the potential to drive up the price of a security if ordered all at once. To buy their intended number of shares without skewing the market price, institutional investors spread their accumulation of a company's stock over a period of time.

Finally, as opposed to paying dividends to investors, a company can choose instead to accumulate its earnings in order to accelerate their expansion so that down the line it can produce extra value for shareholders.

Accumulation in Annuities

The accumulation phase has an alternate definition with regard to annuities. An annuity is a financial product that pays a fixed stream of payments to an investor. The primary use of this is as an income stream for retirees. Annuities have two main phases: the accumulation phase, during which the investor funds the annuity, and the annuitization phase, after payouts begin.

  1. Accumulating Shares

    Accumulating shares is a classification of common stock given ...
  2. Reinvestment

    Reinvestment is using dividends, interest and any other form ...
  3. Capital Accumulation

    Capital accumulation typically refers to an increase in assets ...
  4. Accumulated Income

    Accumulated income is that portion of a corporations' net profits ...
  5. Accumulation Unit

    1) In the case of a variable annuity, a measurement of the value ...
  6. Asset Accumulation

    Asset accumulation is the increase in financial assets held through ...
Related Articles
  1. Retirement

    Should Retirees Reinvest Their Dividends?

    Find out why dividend reinvestment may or may not be the right choice for retirees, depending on their financial needs and investment goals.
  2. Investing

    Got Dividends? Here's How to Reinvest Them

    Reinvesting dividends is a good idea if you intend to hold your shares for the long term.
  3. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the underlying stock's price, the role of market psychology, and how to predict price changes after dividend declarations.
  4. Financial Advisor

    How to Plan for Taxes on Dividends

    Dividends are taxed differently than other investment income. Here are some strategies to help lower taxes on dividends.
  5. Investing

    Best Places to Find High-Dividend Yield Stocks

    Learn about the advantages of stocks with good dividend yields, such as income, stocks in defensive sectors and strong-performing companies.
  6. Trading

    PayPal Holdings Inc.: Payment Tech’s Growth Opportunity

    Institutional accumulation was part of this breakout story.
  7. Investing

    Build a dividend portfolio that grows with you

    Learn how to build a dividend portfolio that grows with you. Find out how to balance risk and return, to produce adequate income despite inflation.
  8. Investing

    Dividend Ratios: Payout And Retention

    The dividend payout ratio and retention ratio measure how much profit a company gives back to shareholders as dividends. When a business earns money, it must decide whether to use all of its ...
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center