Capital appreciation can occur on a variety of investments such as stocks, investment trusts, real estate, gold, and other commodities and tradable assets.
It is simply the increase in the price of an investment. A capital appreciation usually generates an investment return. This article discusses capital appreciation and investment returns.
What is capital appreciation and investment returns?
A capital appreciation is a rise in the market price of an investment. Capital appreciation is the difference between the purchase price and the sale price of an investment when it is sold.
For example, if an investor buys shares for 100$ per share and the market price rises to 120$, a capital appreciation of 20$ per share will occur. If the share is sold due to a capital increase, a capital appreciation of 20 $ per share will be incurred.
Most investments rely on appreciation, assets that appreciate are stocks, bonds, real estate, and precious metals.
Investment returns or return on investment (ROI) is a performance measure used to evaluate the efficiency of an investment with the efficiency of several different investments. ROI measures the return on a particular investment, relative to the investment’s cost.
Return on investment is derived by dividing the investment profit earned by the cost of that investment. For example, an investment with a profit of $500 and a cost of $500 would have an ROI of 1, or 100% when expressed as a percentage.
Assets designed for capital appreciation and investment returns
Some assets can generate profit through appreciation. Investors hold these assets for the long term in the hopes that prices will rise. Some of these assets are discussed below.
Stocks represent ownership in a corporation. A stock is a little piece of a company that can be purchased on an exchange. Stocks can experience a high level of capital appreciation after investment.
Trading stocks is extremely dangerous if you are inexperienced. But if you look at market trends, you can make a profit. Knowing the indicators of technical analysis and stock analysis can help with analyst prediction and revenue reports.
There are many tools for stock analysis and price forecasts. For example, a price forecast from Wallstrank provides insights into how a stock can perform. Technical analysis is the art and science of forecasting future prices from past price movements that investors have observed.
2. Real estate
Real estate refers to land and everything related to that land. Real estate investment trusts (REITs) are securities related to companies that own real estate or manage related assets.
REITs are traded like stocks, giving investors access to real estate without owning physical assets. REITs pay dividends, but they are often considered riskier than dividend stocks. REITs are known to appreciate over time thereby generating high investment returns.
3. Exchange-traded fund (ETF)
An exchange-traded fund (ETF) is an investment vehicle that contains a variety of stocks, bonds, or groups of commodities. ETFs can track stocks in specific industries.
ETFs are called passive investments because they do not require management on the part of the investor. Investors simply buy and hold ETFs like regular stocks.
Some examples of commodities that can generate capital appreciation are petroleum, copper; agricultural products such as corn, wheat, and soybeans. Precious metals such as gold, silver, and platinum. Goods have so-called “intrinsic value”.
Precious metals in particular can be used by some investors as a store of long-term value and can experience significant capital appreciation during a crisis.
Gold and silver have many industrial uses, especially in the manufacture of electronic devices such as computers, smartphones, tablets, and televisions. Gold and silver have risen sharply over time, measured by the value of fiat currencies issued by governments (US dollars).
Factors that results in investment returns and capital appreciation
Several factors result in capital appreciation and investment returns. Some of these factors are touched upon below.
1. Business growth
As a business grows these can have a significant impact on capital appreciation and investments made by investors. In the most traditional and simplest sense, a stock price goes up because the basic value of the company it represents goes up.
2. Central bank policy
Lower interest rates allow businesses to borrow money at a lower cost. You can then use the money you borrow to invest in and grow your business.
Alternatively, you can buy back your stock, which is called a share buyback. In this way, lowering interest rates allows central banks to flood their economies with money without creating new currencies.
Quantitative easing refers to the central bank’s intervention in buying long-term securities to increase the money supply and facilitate investment and lending.
These methods can lead to capital appreciation because more money is being added to the economy money that then flows into assets, causing their high.
Another possible reason for capital appreciation is speculation. Speculation occurs when many investors believe that a particular asset is more valuable than it is and buy the asset in the hope of a higher price.
This will increase the price, but you will find that investors panic and sell, eventually dropping sharply and there is no fundamental reason to own the asset.
4. Assets appreciation
Assets such as stocks can experience a rise in capital in a short time. Capital appreciation can also occur over a long period in asset classes such as real estate. Capital appreciation in different asset classes occurs for a variety of reasons. For example, the capital increase of commodities such as gold and industrial products such as copper and zinc depends on demand and trade factors.
Capital appreciation is part of a long-term investing strategy. Capital appreciation can result in huge investment returns for investors and several tools can be used by investors to manage their assets.
This article explained capital appreciation and investment returns, assets designed for capital appreciation and investment returns, and finally factors that result in investment returns and capital appreciation.
Therefore for an investor to experience capital appreciation and investment returns, the investor should invest in the right assets, monitor these assets, and use technical analysis tools.