Capital Appreciation

Capital Appreciation Meaning

Capital appreciation means the increase in the market value of assets compared to its purchase value within the stipulated time period. The assets may include stocks, land, building, fixed assets and other assets.

How to Calculate Capital Appreciation?

Capital Appreciation = Current Value – Purchase Price.

Here, the current value means the current market value of the asset. The same will be the price at which the asset can be sold in the market at present.

Capital-Appreciation-Formula

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Source: Capital Appreciation (wallstreetmojo.com)

Example

Mr. John purchased land in California. He purchased the land in January 2016 for $2,00,000. Now, the price of the land has increased and reached about $2,25,000 in the year 2020.

Solution

Calculation of Capital Appreciation 

Capital Appreciation Example 1
  • = $2,25,000 – $2,00,000
  • = $25,000

Causes

  • Strong economic growth may also result in appreciation, especially for some assets such as stocks.
  • Lower interest rates lead to an infusion of money in the market and create a possibility of appreciation.
  • With respect to assets such as the stock of a company, it may take place because the company is outperforming other competitors.
  • In the case of the real estate sector, capital appreciation may be a result of developments taking place in the nearby arena.

Capital Appreciation vs. Capital Returns

Capital appreciation means the increase in the market value of the assets. It reflects the gain one could make by selling the asset at the current value at a particular period. The gain, which is calculated, is purely hypothetical since the actual sale does not take place.

Capital return, on the other hand, means the profits earned by a person on the sale of an asset. It can be calculated by reducing the purchase price of the asset from its sale value. In the case of capital return, the gain is calculated in actual gain since the sale has been carried out, and there is no scope of changes in the future.

Advantages

This concept helps a person to know the current profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more that may arise if the asset is sold. Based on such calculation and expected future prices, a person may decide whether to hold such an asset or sell it for maximum profits.

Disadvantages

It is only an indication of the profits which may be earned if the asset is sold at present. It is only when the asset is disposed of; the real profits will be known.

Conclusion

The concept of capital appreciation is beneficial in the case of some assets, such as real estate and investments. The same reflects the appreciation in the value of the asset and gives the investor of assets a fair idea about its present profitability.

Recommended Articles

This article has been a guide to Capital Appreciation and its Meaning. Here we discuss how to calculate capital appreciation along with an example, causes, and differences from capital returns. You can learn more from the following articles –