What is Accumulation?
Accumulation can take on a few different meanings in finance. Generally, to accumulate something is to increase the amount of it.
In terms of trading, accumulation typically refers to a position size in an asset that increases over multiple transactions.
Accumulation can also refer to the overall addition of positions to a portfolio.
It can also refer to a general increase in buying activity in an asset. In this case, the asset is said to be "under accumulation" or "being accumulated."
- Accumulation means the amount of something is increasing over time.
- In finance, accumulation more specifically means increasing position size in one asset, increasing the number of assets owned/positions, or an overall increase in buying activity in an asset.
- The accumulation phase in an annuity refers to the period where premiums are being paid or money is being put in.
When a trader increases the size of their position over multiple transactions, they are accumulating the stock or other asset. A trader may want to accumulate a position over time, instead of all at once, in an effort to get a better average price, have a lower market impact, or attain information from multiple purchases.
Traders who take large positions attempt to limit their market impact by buying as covertly as possible. Buying too much at one time could cause the price to move up, thus increasing the cost of future purchases. Each transaction also provides information to the trader. If they place an order to buy and it pushes the price up easily, they know there are limited sellers. If they place a bid and it is instantly filled, they know there are sellers and they can likely buy more without pushing the price up.
Accumulation also refers to when an investor or portfolio manager adds positions to a portfolio. In this sense, an investor is accumulating investments. As an investor contributes to their retirement portfolio over time, they may use the funds to buy additional stocks, commodities, and other assets.
When the price of a stock or other asset is rising, especially on rising volume, it is said to be under accumulation. This means that traders and investors are willing to buy the asset in mass. Once the asset starts to decline in value, this is called distribution. In this sense, accumulation refers to buyers that are more aggressive than sellers, which pushes the price up. Distribution refers to sellers that are more aggressive than buyers, which pushes the price down.
Accumulation in Annuities
The accumulation 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.
Life insurance is an example of this. Up to a certain age the person may contribute a monthly premium to the insurance policy. After a certain age, they start to receive money or a payout.
Example of Accumulation in a Stock and Portfolio
It is possible that an investor could have multiple types of accumulation going on at one time.
Assume an investor is interested in purchasing PayPal Holdings Inc. (PYPL) as a long-term investment in their portfolio. The addition of this stock to others they already own would represent an accumulation in stocks; they are owning more over time.
The investor may also decide that they want to buy PayPal once they see others are starting to accumulate it. This shows that the stock is in an uptrend and the price is moving higher.
The investor notes that the stock has broken through resistance in the $89 region and has been ascending since.
They initiate a purchase at $91. The stock price stalls, but then continues to move up, and the investor buys more at $95. The stock continues to perform well, and they decide to buy more at $101.
This type of buying over multiple transactions is called accumulation. They didn't buy their position all at once. Instead, they spread it over multiple transactions which increased their position size in the stock over time.