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?
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.
- The purchase price, also known as acquisition price, is the cost incurredCost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more to purchase a particular asset.
- It is calculated by reducing the purchase price of the asset from the current value of the said asset.
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For eg:
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
- = $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
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