Investing in shares for capital growth

Shares can provide capital growth

If you plan to invest for the medium- to long-term (five to seven years), you might be looking for an investment that increases in value over time. This is called capital growth.

Shares can provide capital growth through increases in their market price. Under normal conditions, the movement in a company’s share price reflects changing expectations on it profits. That is, earnings per share directly influence a company’s price per share.

When a company makes a profit, it must decide how to distribute it. For example, it might pay a portion of the profit to shareholders in dividends, or reinvest 100% back into the company to finance expansion, new technology or equipment.

The ability to reinvest in the company to promote greater growth and future profit (and dividends) can result in higher share prices — the benefit of which is passed on to shareholders. And as a company’s profits improve over time, demand for the company’s shares increases, pushing up share prices and providing more capital growth.

Shares have different characteristics – some shares may provide more income, while others may provide more capital growth.

For instance, if you had invested $10,000 in the sharemarket at the end of December 1995, the value of your money would have quadrupled over the 15 years to December 2010 – see figure below.

Shares can provide capital growth
Growth of the Australian sharemarket (dividends reinvested)