Capital Appreciation
In short, capital appreciation is simply the increase in the value of the shares that you own. If you were to sell your
shares of stock at a price higher than what you purchased them for, you make a profit. Conversely, if you sell at a price
lower than what you purchased them for then you've incurred a loss.
What causes capital appreciation and depreciation?
The reality is that the price of stocks increase and decrease in value due to speculation on Wall Street. The value of
your stock on the stock exchange is simply the amount of money that other investors are willing to pay for that share
of stock at that moment, not necessarily the true value of that share. What do we mean by that?
Remember that stocks are portions of ownership in business. By investing, you are directly (or indirectly through mutual
funds) a part owner of a business. Business ownership is your investment, not the little scrap of paper you get when you
purchase the stock. You don't simply own a piece of paper that has a random value associated with it. The business you
own has an intrinsic value of worth. But Wall Street is full of speculators, and the value of the stock is not always
determined by the worth of a business.
Investors on Wall Street tell you how much they would pay for your stock, and that's what the stock price becomes - good
or bad. Remember, though, that the value of a stock, in the long-run, is determined by the value of the business. Not what
Wall Street thinks it's worth. In the end, reality rules over speculation. In other words, it's reversion to the mean.
The market will always move in the direction based on the true value of a company's worth over the long term. Hopefully the direction is
upward and gives you capital appreciation.
As an example, take the dot-com bubble of the late 90's. Wall Street was full of speculators that misjudged the value
of the tech companies they were investing in. As they kept funneling money into these tech stocks the price kept
going up. As the price went up, more and more investors put their money into them inflating the value of the stock
even more. It's a vicious cycle.
At some point, though, something has to give. Investors eventually realized that stocks were incredibly overpriced.
Much higher than the true value of the company's worth. What happened? Well, the bubble burst as all of Wall Street
began selling off causing the stock prices to plummet. All that was really happening was that the prices of stocks
were returning to a level that more closely matched the true value of a company's worth. Again, reversion to the mean.
