In the business of investing, there are certain general assumptions. Top on that list is that everybody wants to make more money.
That is, all investors want to increase the value of their investments. While there are many factors or even tradeoffs to be made, capital appreciation is generally one of the core goals of investing.
In specific terms, capital appreciation occurs when there is an increase in the price or value of assets. When the company stocks or bonds held by an investor is said to have increased in how much it is worth, then capital has appreciated.
As such, it is the difference between the purchase price and the sales price (otherwise called cost price and selling price respectively) of an asset. However, if an investor makes sales for less than they got it, it is referred to as capital loss. If like most investors, your aim is capital appreciation, there are certain tools and guidelines that will come in handy.
Here are some of them:
- Master The Art Of Portfolio Management
The primary goal of investing is, of course, not to lose money but to gain more. When you hold similar assets in one investment portfolio, if that industry crashes, your entire investment portfolio is exposed and you can lose everything. By diversifying your investment portfolio, you expose your business to a wide range of industries, asset classes, company sizes, etc. that you may invest in so that if one fails and another does well, you will attain a balance. Think of portfolio diversification as more of a way of putting your eggs in different baskets. The reason portfolio diversification is a tool for capital appreciation is that it makes you resist the urge to invest in similar things and possibly losing all of your money all at once. By owning various investments spread across different business platforms, risks attached are minimized. Investment assets generally rise and fall, thereby optimizing your returns on an overall note.
- The Power Of Compounding
Known as the eighth wonder of the world, compounding is a powerful tool in ensuring capital appreciation. In finance, the principle of compounding simply means that you can earn interest in addition to a preexisting capital and interest, thereby growing your money exponentially. Contrary to simple interest by which you earn interest on your principal, compound interest allows you to earn interest on your principal alongside accumulated amounts of interest consecutively. So, if you have N1000 and earn 20% interest, you’ll have N1200. If you go ahead in earning another 20% on that, you’ll get N1320. Compounding combines elements of time, sound interest rates, and your capital to make your money work for you. With the power of compound interest, you can relax and watch your money work hard to make you rich.
- Speculative Investments
The principles are clear – the higher the risk, the higher the potential returns. As such, if you want to focus on capital appreciation especially over the short term, then you might need to be willing to take a lot more risk. Speculative investments are investments with a high degree of risk. The basis for a speculative investment is not on the current strength of a business, but rather on futuristic value. That is, the investor hopes that one day, the business will earn enough to warrant capital appreciation. There are no guarantees. Many traders are attracted to speculative stocks because of their volatility, creating room for the generation of greater returns than a regular investment.
Yet, one of the most trusted tools for capital appreciation is patience. Over the long term, volatility evens out and you can see the real value of all the years of hard work the company has put in to ensure you make the most of your investments. This is how to attain capital appreciation as an investor.