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Capital appreciation is an increase in an investment’s market price.

Suppose Bob buys a share of ABC Corporation for $10. If that one share of ABC is trading at $15 a year later, Bob’s capital appreciation is $5. The investment has increased by 50% from its original purchase price, or its cost basis. All Bob had to do was hold it.

Capital appreciation is one of two main sources of returns. The other is dividend or interest income. If ABC also pays out a dividend of $1 per share, Bob’s total return on his investment is $6, or 60%.

Capital appreciation cannot be taxed until the investment is sold. Once it is, it becomes a capital gain that’s taxed at different rates depending on whether it came from a short- or long-term investment.

Many mutual funds list capital appreciation as a top objective. Property investments also offer capital appreciation. Investments intended to provide capital appreciation come with more risk than those chosen for capital preservation and income, such as bonds or dividend-paying stocks. Capital appreciation funds are appropriate for investors who are willing to tolerate risk.

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