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What is Capital Accumulation?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 August 2016
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Capital accumulation is the process of purchasing or otherwise acquiring more assets than are needed for usual operations, and that have the possibility of appreciating in value over time. This general idea can be applied to creating a stock portfolio as well as in the general operation of a household or business. Capital accumulation provides the comfort of being able to effectively manage day to day expenses, while also creating a bank of resources that can be called upon to deal with unanticipated expenses.

Investors can make use of capital allocation by incrementally acquiring additional shares of a given stock. With this model, the idea is to acquire those shares using profits made from other investments. The actual purchase of the shares is over a period of time, allowing the investor to make the purchases in smaller lots and thus not trigger a response from other investors, who then drive the unit price upward as they seek to buy any currently available shares. Over time, this strategy allows the investor to amass a considerable percentage of the issued shares and thus create a solid source of revenue over the long term.

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Businesses engage in capital accumulation by using a portion of their profits to make capital purchases. This can include the purchase of real estate or other assets that have a reasonable expectation of appreciating in value over the years. These purchases may also figure into the future expansion plans of the business, and make it possible to eventually move forward with those plans with a minimum of expense. For example, if a business utilizes some of its profits to purchase a tract of land, then later builds a facility on that land, the startup costs for that new facility are reduced. At the same time, the now developed land is likely to appreciate in value, which only helps to increase the overall net worth of the business and provides additional resources to aid in the ongoing capital accumulation process.

Even for individuals, the concept of capital accumulation is helpful. Households may choose to purchase a weekend home, paying for the home out of income that is not needed to manage all other household expenses. Over the years, both the main residence and the weekend home appreciate in value. When the homeowner retires, he or she can sell the primary residence or the weekend home, usually at a considerable profit, and utilize those funds to live comfortably. Should some sort of emergency arise in the intervening years, one of the properties can be sold, leaving the homeowner with a place to live and resources to begin accumulation capital investments once again.

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