Capital appreciation refers to the amount of increase found in the principal value or the price per unit of a share of stock. This increase is often a demonstrable appreciation in value, based on verifiable historical data. In other applications, a capital appreciation may be a projection of the rate of increase in value that is anticipated over a given period of time.
The potential for a stock to generate capital appreciation is an important factor when an investor is interested in creating a component of the financial portfolio that is focused on long-term growth. Within the approach, there is a need to secure stocks that are available at an equitable asset price, but where there is reasonable potential for an increase in market price over an extended period of time. Identifying these types of investments can usually be achieved by conducting a historical analysis on a potential acquisition. The potential asset will be evaluated for stability and the rate of increase in price it has demonstrated under both current and past market conditions. Getting a clear understanding of how the stock has performed in different types of market conditions can make it much easier to project the capital appreciation that can be anticipated over a period of one or two years.
One important factor to remember about capital appreciation is that the concept applies to the principal amount that is invested in the asset, such as the price per share of the stock. Capital appreciation does not refer to an increase in the current amount of interest income that is realized from owning the asset. There is no change in the income generated by the asset unless the asset is sold while the stock is currently being traded at a price that is higher than the initial purchase price.
While capital appreciation can refer to any actual or projected increase in market price for an asset, it does not necessarily have to involve a great deal of risk. It is possible to secure investments that demonstrate an excellent potential for appreciating in value on a modest but consistent basis. However, more adventurous investors can take advantage of a strategy that is referred to as a capital appreciation fund. This approach involves mutual funds that utilize high-risk assets with the potential for rapid and generous growth.