Capital Appreciation: What it Means and Why It's a pillar of Wealth for You
An Acceler8now.com Investing Education Resource July, 2007
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| Past performance is no guarantee of future results. A risk of loss is involved when you invest in stocks. Views expressed in this article and elsewhere on this website are not a specific recommendation to you. Always consult your financial adviser. |
Capital appreciation refers to the increase in the market value of an investment due to rising market price. If price gains push up the price of your stock or the market value of your property or other asset, that's capital appreciation. It is a major way to profit from an investment. For stock investors, dividend payment, which includes bonus shares, is the other pillar of reward. As you will find out, however, it is the capital appreciation runs that provide you the opportunity to make a kill in stock investing. Price appreciation may be unique to a particular stock or may reflect a general trend of the market. When it is relatively market-wide and sustained, we speak of a bull run or bullish market.
Benefiting from Capital Appreciation
Shrewd investors aim at selling off the asset at or close to the market high (when an appreciation run is beginning to lose steam). They also target buying back when a price fall (depreciation) is near its bottom. That way, the investor can optimise returns. The challenge, however, is in being able to read the market to know the ideal point to take any of these investment actions. Errors of judgment are always very possible, meaning you need to really put on your thinking cap. You in fact have to be equipped with relevant facts. The bottom-line: as an investor, always seek to have all the information you can - about the market and about the specific stock(s) you have interest in. Don't throw in money blindly. And as always, a good investment adviser or stockbroker can also be helpful.
Realising Your Gain
Capital appreciation potentially puts money in your hands. It's important to stress though, that it's only when the stock is sold that gains are realised. Realisation means you have actually taken or received the gain. This point is being made because you need to understand that a massive appreciation in the value of a stock can easily be wiped by a reversal due to price losses. In fact when a stocks price has risen significantly, many holders are likely to seek to realise their profit (called profit-taking), by selling of their holding in part or full. If this assumes a significant scale (many shareholders seeking to sell off), this fact itself is likely to lead to a price fall. Reason: a lot of supply to the market that may not be matched by demand. While this may be short-lived, it could also endure, meaning that you have missed an opportunity to sell at a good price, if you held on to your stock. So, at a good price appreciation, it may be wise to take your profit and wait/search for another opportunity. Our related online article Be Smart and Scale Out When the Market is Up will provide you more tips on playing a rising market while How To Find A Good Stockbroker And Get The Best Results gives clues you can use to choose and manage a stockbroker.
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