Loading the player...

What is 'Capital Appreciation'

Capital appreciation is a rise in the value of an asset based on a rise in market price. It occurs when the asset invested commands a higher price in the market than an investor originally paid for the asset. The capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis.

BREAKING DOWN 'Capital Appreciation'

Capital appreciation is one of the two main sources of investment returns, with the others being dividend or interest income. The combination of capital appreciation with dividend or interest returns is referred to as total return. Capital appreciation can occur for many different reasons in different markets and asset classes. It can also occur with financial assets such as stocks or with real assets such as real estate.

Example of Capital Appreciation

An investor purchases a stock for $10 and the stock pays an annual dividend of $1, equating to a dividend yield of 10%. A year later, the stock is trading at $15 per share and the investor has received the dividend of $1. The investor has a return of $5 from capital appreciation as the price of the stock went from the purchase price or cost basis of $10 to a current market value of $15; in percentage terms, the stock price increase led to a return from capital appreciation of 50%. The dividend income return is $1, equating to a return of 10% in line with the original dividend yield. The return from capital appreciation combined with the return from the dividend leads to a total return on the stock of $6 or 60%.

Causes of Capital Appreciation

The value of assets can increase for several reasons. There can be a general trend for asset values to increase including macroeconomics factors such as strong GDP growth or Federal Reserve policy such as lowering interest rates. On a more granular level, a stock price can increase because the underlying company is growing faster than analysts expect, or the value of a house can increase because of proximity to new developments such as schools or shopping centers.

Investing for Capital Appreciation

Capital appreciation is often a stated investment goal of many mutual funds. These funds look for investments that will rise in value based on increased earnings or other fundamental metrics. Investments targeted for capital appreciation tend to have more risk than assets chosen for capital preservation or income generation, such as government bonds, municipal bonds or dividend-paying stocks. Because of this, capital appreciation funds are considered most appropriate for risk-tolerant investors. Growth funds are customarily characterized as capital appreciation funds as they invest in the stocks of companies that are growing quickly and increasing their value. Capital appreciation is employed as an investment strategy to satisfy the retirement and lifestyle goals of investors.

Capital Appreciation Bond

Capital appreciation bonds are backed by local government agencies and are therefore known as municipal securities. They work by compounding interest until maturity, when an investor receives a lump sum that includes the value of the bond and the total accrued interest. This differs from regular bonds, which typically pay interest payments each year. These types of investments are often used to fund municipal projects such as parks and roads.  

RELATED TERMS
  1. Appreciation

    Appreciation is the increase in the value of an asset over time. ...
  2. Capital Growth

    Capital growth is the appreciation of the value of an asset over ...
  3. Income Fund

    Income funds pursue current income over capital appreciation ...
  4. Equity Income

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

    A return from an investment that is not considered income. The ...
  6. Tax Differential View Of Dividend ...

    The preference of some investors for equity appreciation over ...
Related Articles
  1. Managing Wealth

    How Will Your Investment Make Money?

    Discover the basic types of investment income and which asset classes pay them.
  2. Investing

    Yield vs. Total Return: How They Are Different

    Understanding yield vs. total return is essential in constructing portfolios that meet income generating needs while providing growth for the future.
  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. Retirement

    Top 5 JPMorgan Funds for Retirement

    Discover five J.P. Morgan mutual funds that provide high returns and excellent diversification of retirement savings. Learn how to allocate assets properly.
  5. Retirement

    How Retirees Should Think About Retirement Income

    It’s the savings you have accumulated for retirement that make the difference between just getting by and being able to enjoying life.
  6. Investing

    Top 4 things that determine a home's value

    Your house depreciates over time, while the land beneath it is likely to do the opposite. Here are the top determinants of your home's value.
  7. Investing

    FSDIX, VDIGX, FEQTX, VEIPX: Top Dividend Paying Equity Funds

    Discover five of the best dividend-paying mutual funds that primarily invest in U.S. equities, and learn about the characteristics of these funds.
  8. Financial Advisor

    Top 5 Mutual Funds From Natixis (NEFSX)

    Discover five mutual funds from Natixis Funds that provide high income, growth and preservation of capital while diversifying a retirement savings plan.
Hot Definitions
  1. Current Assets

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

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

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

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

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center