What is 'Capital Growth'

Capital growth, or capital appreciation, is the increase in value of an asset or investment over time. Capital growth is measured by the difference between the current value, or market value, of an asset or investment and its purchase price, the value at the time the asset or investment was acquired.

BREAKING DOWN 'Capital Growth'

The investment objective varies among investors depending on their level of risk tolerance. Investors with low risk tolerance are likely to seek income whereas investors with high risk tolerance are likely to seek capital growth. Risk levels of capital growth investment objectives can be further classified into moderate growth and high growth. In the equity realm, an investor seeking moderate capital growth would invest in blue chips and an investor seeking high capital growth would invest in more speculative investments. In general, the asset classes in which an investor has an ownership stake, such as equities or real estate, are the best prospects for capital growth. While these asset classes can have income components —equities through dividends and real estate through rental income — investors with a capital growth investment objective seek the higher returns possible due to the capital growth component of price appreciation.

A diversified portfolio would typically have investments with capital growth potential —like stocks and equity mutual funds or ETFs —as well as assets that produce income such as the interest earned on bonds and real estate income trusts (REITs). The asset allocation would be determined by various factors such as the investor's objective, risk tolerance, and investment horizon. These factors would also determine the equity allocation between moderate capital growth investments in blue chips and high capital growth investments in speculative stocks.

Companies with stocks that have the best capital growth prospects generally do not pay dividends. Instead, these companies try to generate higher future returns by reinvesting their profits to fund research and development or to expand operations or infrastructure. Companies in high-growth sectors such as technology and biotechnology are well-known for employing this strategy.

From a tax perspective, income generated from an asset or investment is recognized and taxable in the tax year it is paid. Capital growth, on the other hand, is not taxed until the asset or investment is sold. This deferral of taxation is a significant advantage for investors with capital growth investment objectives over investors with income investment objectives.

RELATED TERMS
  1. Growth And Income Fund

    Growth and income funds pursue both capital appreciation and ...
  2. Growth Investing

    Growth investing is a strategy whereby an investor buys stocks ...
  3. Investment Product

    An investment product is a product offered to investors based ...
  4. Equity Income

    Equity income is primarily referred to as income from stock dividends. ...
  5. Capital Gain

    Capital gain is an increase in a capital asset's value that is ...
  6. Capitalization

    Capitalization, in accounting, is when the costs to acquire an ...
Related Articles
  1. Investing

    A Beginner's Guide to Growth Investing

    Learn growth investing strategies and techniques across asset types. Find out how to research and analyze key fundamental data to evaluate growth stocks.
  2. Financial Advisor

    4 Steps to Building a Profitable Portfolio

    This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation.
  3. Investing

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  4. Managing Wealth

    Asset Allocation: The First Step Toward Profit

    Understanding the different asset classes is an essential part of portfolio diversification.
  5. Financial Advisor

    An Introduction to Asset Allocation

    A portfolio is only as strong as its asset allocation. To create the right one, investors need to determine their risk tolerance, time horizon and goals.
  6. Investing

    The Top 5 Large Cap Growth Mutual Funds for 2016

    Understand how growth investing through mutual funds presents an opportunity for investors, and learn the best growth mutual funds for 2016.
  7. Investing

    Know When To Buy & Hold It, Know When To Fold It

    A passive buy-and-hold strategy using ETFs is one of the most efficient ways of building a portfolio.
  8. Financial Advisor

    Asset Allocation vs. Security Selection: The Main Differences

    Both are important to a long-term investment strategy, but asset allocation and security selection have different missions.
  9. Personal Finance

    Your Risk Tolerance May Change, So Your Portfolio Should Too

    It is important to rebalance your portfolio when your risk tolerance changes.
RELATED FAQS
  1. Which asset classes are the most risky?

    Understand why equities and real estate are the two riskiest asset classes, though they also provide the greatest potential ... Read Answer >>
  2. What does high working capital say about a company's financial prospects?

    Learn about net working capital and what a high figure indicates about a company's financial prospects, including the importance ... Read Answer >>
Hot Definitions
  1. Diversification

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

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

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

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

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

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center