What Causes Capital Appreciation?

What Causes Capital Appreciation?

Capital appreciation

What causes capital appreciation? The most important causes are:

1. THE CONTINUED PROSPERITY of the company, and the retention of the bulk of its annual profits for expansion. This may result in:

(a)The allotment, over the years, of 'Scrip' issues: also called 'Bonus', 'Free', 'Plough' or 'Capitalisation' shares. These are made to existing shareholders, when the company's business prospers. They are given in a certain ratio, e.g., one 'Scrip' to each two existing shares. The term 'Capitalisation' is used because the company capitalises part of its Reserves (changes Reserves into share-CAPITAL, hence 'Capitalisation').

The repeated allotment, over the years, of 'Scrip' issues, results in the number of your shares being multiplied considerably. It is this Increased number of your holdings, taken at the current market price, which gives you the present value of your original outlay, and which will show that the growth of your capital has in fact taken place. So if in 1935 you purchased 50 shares for £40 each, your outlay was £100; over 29 years, the original 50 shares may have become 20,000.

(b)The offering by the company of 'Rights' shares, over the years to its existing shareholders. This is done in order to finance expansion, or to repay a bank loan or overdraft. 'Rights' are shares offered at a price often containing an element of 'scrip'.

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