What is ‘Capital Growth’
Capital growth, or capital appreciation, is the increase in value of an asset or investment over time. Capital growth is measured by the difference between the current value, or market value, of an asset or investment and its purchase price, the value at the time the asset or investment was acquired.
BREAKING DOWN ‘Capital Growth’
The investment objective varies among investors depending on their level of risk tolerance. Investors with low risk tolerance are likely to seek income whereas investors with high risk tolerance are likely to seek capital growth. Risk levels of capital growth investment objectives can be further classified into moderate growth and high growth. In the equity realm, an investor seeking moderate capital growth would invest in blue chips and an investor seeking high capital growth would invest in more speculative investments. In general, the asset classes in which an investor has an ownership stake, such as equities or real estate, are the best prospects for capital growth. While these asset classes can have income components —equities through dividends and real estate through rental income — investors with a capital growth investment objective seek the higher returns possible due to the capital growth component of price appreciation.
A diversified portfolio would typically have investments with capital growth potential —like stocks and equity mutual funds or ETFs —as well as assets that produce income such as the interest earned on bonds and real estate income trusts (REITs). The asset allocation would be determined by various factors such as the investor’s objective, risk tolerance, and investment horizon. These factors would also determine the equity allocation between moderate capital growth investments in blue chips and high capital growth investments in speculative stocks.
Companies with stocks that have the best capital growth prospects generally do not pay dividends. Instead, these companies try to generate higher future returns by reinvesting their profits to fund research and development or to expand operations or infrastructure. Companies in high-growth sectors such as technology and biotechnology are well-known for employing this strategy.
From a tax perspective, income generated from an asset or investment is recognized and taxable in the tax year it is paid. Capital growth, on the other hand, is not taxed until the asset or investment is sold. This deferral of taxation is a significant advantage for investors with capital growth investment objectives over investors with income investment objectives.