Capital appreciation refers to the increase in the value of an investment asset, as indicated by its market price. For example, when a stock’s price rises due to strong earnings or market demand, or when the value of your home appreciates because of improvements or a favorable real estate market, these are examples of capital appreciation. If you’re looking to make the most of your investment potential, consider consulting with a financial advisor.
What Is Capital Appreciation?
Capital appreciation is measured by the difference between an asset’s current price and its original purchase price. It reflects the growth in the asset’s value over time, but does not consider any additional income or profits generated from the asset. In essence, it captures how much the value of an asset has increased compared to what you initially paid.
A common example of capital appreciation is investing in stocks. For instance, if you purchase shares at $10 each and the price rises to $15, the appreciation is $5 per share.
Many types of investments rely on appreciation, including financial securities (like stocks and bonds), real estate and precious metals. However, one notable exception is when investors take short positions, where they profit from a decline in the asset’s value.
It’s important to note that capital appreciation strictly pertains to price changes and excludes other forms of value, such as income from dividends or interest payments.
Capital Appreciation and Taxes
Another way of describing capital appreciation uses an investment’s tax implications.
It is how much the value of an investment has increased compared to its original value used for tax purposes (this is called a “cost basis”). Your total capital appreciation, then, is the amount of money you would pay taxes on if you sold the asset today.
As a result you can measure appreciation three different ways. For example, say you buy a piece of property. You could measure its appreciation:
- Comparing the property’s current market value against the price you paid for it;
- Comparing the property’s current market value against the assessed value on which you paid property taxes at the time of purchase;
- Calculating the amount of money you would pay taxes on if you sold the property today.
In most situations all three of these formats will lead to the same results. Not always however. For example, it’s possible to buy a piece of property for a different price than its assessed tax value. Or you might buy a security in a direct transaction, rather than through a centralized market like the New York Stock Exchange. In this case it’s possible to pay a different price than the current market value, leading to different capital appreciation calculations.
Capital Appreciation vs. Capital Gain
It is important to note the difference between capital appreciation and capital gains.
Appreciation is the unrealized value that your investment has accrued. It is the amount that your investment has grown in value while you are holding it.
Gains are the profits that you realize by selling an investment. The money made after selling an asset provides capital gains.
Selling your investment is when growth turns from capital appreciation into capital gains. There are no tax implications of capital appreciation. You are only taxed on capital gains. As a result, appreciation is a significant part of tax planning. If you have significant investments, it is important to plan carefully before turning capital appreciation into capital gains.
Bottom Line
Capital appreciation is the amount that an investment has gained value since you first purchased it. It is calculated as the asset’s current value subtracted from the price you paid for it. Any investment asset that can gain market value can experience capital appreciation, including stocks, bonds, real estate and more. Appreciation does not apply to any form of value other than market value increases, so income such as interest payments and dividends is not included.
Investment Tips
- Smart, careful strategy can help make sure you see as much capital appreciation as possible. That’s where a financial advisor comes in handy. Finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Investing isn’t just about making money. It’s also about making sure you manage risk. This is a strategy called “capital preservation,” when you make sure to safeguard your investment even while trying to steadily watch it grow. Learn more about it here.
- Do you know how much you’ll need to invest to achieve your goals? Any idea how much of a bite taxes and inflation will take out of your investment? What kind of investment risk will you accept to get the returns you’re looking for? If you haven’t answered any of these preliminary questions yet, SmartAsset’s investing guide may be able to help.
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