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What it’s for
Capital appreciation is the main way many assets make money for you. It happens when the price of that asset increases.
For example, if you buy stocks and see that their value on the stock market is higher than when you bought them, you’ll make a profit if you sell them at that moment.
While bonds earn money mostly through interest, they can also experience capital appreciation. The bond market, a.k.a. the secondary market, is the place to buy and sell secondhand bonds, as well as check the current value. So, you could buy a bond, and instead of holding it until it matures, sell it for more than the initial amount.
How finance folk use it
Capital appreciation happens for a variety of reasons. One reason is that many people are buying the asset, which means demand for it is strong. When the demand for an asset increases, its price tends to increase as well.
For stocks, the price normally increases if the company or sector the stock is associated with looks like it’s doing well.
Prices of bonds tend to go up when interest rates fall. This makes existing bonds have better interest than more-recent bonds that follow the new rates.
Unit investment trust funds (UITFs), mutual funds, and exchange-traded funds also undergo capital appreciation. When the stocks and bonds inside them increase in value, so do they.
You can see this in the net asset value per unit (NAVPU) for UITFs, the net asset value per share for mutual funds, and the stock market price of an exchange-traded fund.
The opposite of capital appreciation is capital depreciation, which is when the price of an asset decreases.
What it means for you
Aside from through interest, capital appreciation is an easy way for you to make a profit on your investment. Keeping an eye on the market lets you know if the current price is higher than the price you paid.
Keep in mind, though, that capital appreciation is never a sure thing. Capital depreciation is always a possibility. Also, as a general rule, your possible returns are likely to be better the longer you keep your investment.
