DEFINITION OF ‘CAPITAL GROWTH’
The increase in value of an asset or investment over time. Capital growth is measured on the basis of the current value of the asset or investment, in relation to the amount originally invested in it. Capital growth is one of the most fundamental investment objectives for investors. It generally connotes a higher appetite for risk as opposed to an income objective, which may denote lower risk tolerance. Capital growth can also be classified into moderate growth and high growth. In the equity realm, the former would include blue chips while the latter would encompass speculative investments. Also known as capital appreciation.
INVESTOPEDIA EXPLAINS ‘CAPITAL GROWTH’
In general, the best prospects for capital growth are offered by assets where the investor has an ownership stake, such as equities or real estate. While both these asset classes have significant income components – equities through dividends and real estate through rental income – outsized returns on such investments accrue through the capital growth component.
A diversified portfolio would typically have investments with capital growth potential – like stocks and equity mutual funds or ETFs – as well as assets that offer income such as bonds and real estate income trusts. The asset allocation would be determined by various factors such as the investor’s objectives, risk tolerance, investment horizon, etc. The factors would also establish the equity allocation, i.e. the relative amounts invested in blue chips and speculative stocks.
Stocks that have the best capital growth prospects generally do not pay dividends, since they may be able to generate better returns by reinvesting excess cash flow in their businesses, as opposed to the returns available to an investor by investing dividend payouts. While companies with substantial growth prospects can be found in any sector, they tend to be clustered in high-growth sectors like technology and biotechnology.
From a tax perspective, capital growth is taxed differently from income. In most jurisdictions, the fact that tax on capital growth can be deferred until the asset or investment is sold, while tax on income investments is due annually, is a significant advantage for capital growth investments.