What Is Capital Growth

Capital Growth Definition

An asset’s value increases with time, and this is known as capital growth or capital appreciation. The difference between an asset or investment’s purchase price or its worth at the time of acquisition and its current market value, or market value, is used to calculate capital growth.

When understanding capital growth, it is crucial to know that the investor involved and the investing objectives determine how much capital growth is desirable. Depending on the investor’s risk tolerance level, the investing objective varies. More risk-averse investors are more likely to seek income, whereas those who are more risk-averse are more likely to seek capital growth.

How To Calculate Capital Growth

As we know, anything that produces income is considered capital, and the increase in value of an asset over a period is referred to as capital growth. This amount is generally determined by the difference between the asset’s current market value and the purchase price or value at the time it was purchased. Calculating the difference between the investment’s current market value and the cost you paid when you first bought it can determine capital growth.

Here is an example: 

Ten years ago, you purchased a housing property for RM 300,000. In the current market, it is now valued at RM500,000. This would mean that you have achieved capital growth of RM200,000. 

To make things transparent, here is how it is calculated:

Property’s current market value – Original price paid = Capital growth
RM500,000 – RM300,000 = RM200,000

Types Of Capital Growth Investments

There are various investments that individuals, entrepreneurs and business owners can use to increase their capital growth strategy. Here we have a few typical capital growth investments.

Equities

An equity investment is revenue put into a business by purchasing its stock on the stock exchange. An individual purchases shares of a corporation when they invest in stock in it. The capital growth of the equity owner increases together with the increase in the company’s worth. Equity investing involves risk and is frequently better suited for long-term investments.

The stocks of businesses with the highest possibilities for capital growth only sometimes pay dividends. Dividends are money given to shareholders as compensation for holding firm stock. Retained earnings, a company’s savings account of accumulated profits over the years, are used to pay dividends. Companies that pay dividends are often well-established, continuously profitable organisations.

Those businesses that do not pay dividends are more focused on increasing their future returns. These growth-oriented businesses reinvest their earnings to support R&D, boost operations, or upgrade infrastructure.

Funds

Exchange-traded funds (ETFs) and mutual funds are popular choices for investors who want to buy a pre-packaged portfolio of securities that includes both stocks and bonds. Both have a wide range of possibilities for different risk and growth strategies. Mutual funds and exchange-traded funds (ETFs) hold a multitude of securities, such as stocks and bonds, to help investors spread their risk or focus on a particular industry. There are diverse ETFs and funds that track the S&P 500 and those that own bank equities (sector-specific).

Bonds

Bonds are regarded as risk-free investment options. When it comes to capital growth, they frequently do worse than equities. Bonds are often utilised as a source of income because the majority of them offer bondholders a fixed interest rate.

Real Estate

Real estate values increase with time, unlike some assets like automobiles and boats. Some investors decide to invest in real estate they believe has great potential, keeping it in their portfolio to improve in value over time. The “buy and hold” strategy typically produces capital growth.

REITs

Real estate investment trusts (REITs) enable investors to participate in the real estate market without owning real estate. A portfolio of commercial real estate facilities, such as shopping centres, apartment buildings, hotels, office buildings, and warehouses, is held through funds known as REITs. As they disperse the rental money from the properties, REITs make payments to investors. Investors can buy shares and get dividends, although this investment often has negligible capital growth than other types.

A capital growth strategy may have tax repercussions and taxes owing to the Lembaga Hasil Dalam Negeri Malaysia (LHDN), just like any investment. For information unique to your financial circumstances, please consult a trusted advisor.

Commodities

Investors frequently invest in commodities like gold, oil, or natural gas to diversify their portfolios. Additionally, the value of these assets may rise over time, resulting in capital growth.

Best Practices Of Capital Growth

Individuals or organisations must adhere to specific financial best practices to develop and achieve capital growth goals. This is to ensure that every aspect of their investing strategy runs well without any setbacks. Here are some of the practices that needs to be followed: 

1. Carry Out Research

Always do your research before making a significant investment of hard-earned cash. Financial websites and scholarly publications frequently include helpful information.

2. Find A Manager For Assets

One of the best courses of action is to find a highly qualified asset manager to assist in directing investment decisions when a company’s portfolio expands.

3. Allocate Resources

Many people and businesses favour distributing assets among different asset classes. Protecting against losses and sustaining strong appreciation helps diversify a portfolio.

4. Utilise A Software For Financial Management

Businesses can track the success of their investments over time and get guidance for their decision-making by using financial risk management software. Such software can also inform their decisions regarding how to invest in new assets and when to sell existing ones.

5. Make Property Uupgrades

Making home upgrades can raise their worth when investing in real estate holdings. Painting, gardening, and flooring are a few frequent renovations.

Things To Consider When Investing For Capital Growth

Stock market investing is a complex undertaking, especially for novice investors. Investors frequently feel hesitant to invest in assets or products with significant potential for capital growth because there are many aspects to take into account and examine, in addition to the increased volatility of such investments compared to safer alternatives.

When considering investing in financial assets with the potential for capital growth, it’s essential to consider the investor’s criteria and risk tolerance. Equities and equity-linked investments are frequently thought of as greater risk and more lucrative investment options. It is conceivable that a stock investor will encounter a market sell-off at some point throughout the investment period. Equity investors should only sell their holdings if market volatility increases, but they should be aware that future potential gains will not be profitable.

The beta statistic is one metric that investors should take into account. The beta statistic compares the volatility of an equities or investment fund over a specific period to the overall market or benchmark. A fund or firm is highly volatile and will move in the same direction as the market if its beta value exceeds one. In contrast, if the beta is positive and smaller than one, the investment is anticipated to be less volatile than the market, yet the price will still move in the same direction. With a negative beta, a security’s price will move in the opposite direction from the market because it is not associated with it.

The dividend rate is a different number equity investors should take into account. A dividend is a type of payment made by a firm to its shareholders as a portion of its earnings. Such dividends are typically a sign of the company’s stability and consistent growth if they are handed out regularly. A firm that pays high dividends should be avoided because this may indicate that it needs to invest more in its future.

Summary 

It can be difficult for investors seeking capital growth to select the products that best meet their needs and goals. Less seasoned investors may lose money if they cannot tolerate volatility or attempt to time the market. It is critical to stress that adequately managing a portfolio of equity-linked assets requires expertise, knowledge, and experience. Investors are strongly advised to seek investment counsel amid challenging economic and market conditions, particularly from a private equity firm with a team of highly qualified specialists who can help ease your capital growth investment journey.