Definition: A fancy way of describing an increase in the value of an investment.
Example: Dylan purchases 100 shares of CAD Corporation for $50 per share. A year later the share price has risen to $55. His investment has appreciated $5 per share, or 10%.
Investeach explains: One might wonder what else an investor would seek besides capital appreciation. The answer is income. In our above example, if CAD Corp. also paid a dividend of $1 per share over the course of Dylan’s ownership, then we can say he earned 100 * ($1/ $50), or an additional 2% in dividends. His total return, the amount he earned from capital appreciation and dividends received, would be 10% + 2%, or 12%.
Corporations who place the priority on getting bigger and increasing their share prices are known as growth stocks. These corporations typically don’t pay a dividend, preferring to reinvest all profits in their businesses. Therefore, investors most interested in capital appreciation should invest in growth stocks.
Riddle me this:
1. YAD Corp’s share price has gone from $38 a year ago to $45 now. How much has it appreciated?
2. Besides capital appreciation, how else can investors benefit from their investments?
3. With which type of corporation do we have a best chance to achieve capital appreciation, and why?
4. How do we calculate the total return an investor earns on a stock investment?