In its simplest form, "stock price appreciation" means the value of a stock has increased. For example, if you purchased stock for $17 per share and it is now $19 per share, your shares have appreciated by $2 per share. In the event of a stock split, your stock price might decrease in value per share, but you won't lose money because you'll get double the number of shares.
Depending on how much your stock appreciates and what you do with your capital gains, you'll have to address an income tax liability. Understanding what causes stock prices to appreciate – and how you can also make money with dividends – will help you better invest your money, or understand how it's being managed.
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Stock Appreciation Meaning
When your stock appreciates, it can refer to any time period the stock increases, or a specific period. This is also known as share price appreciation. For example, if your stock is worth $17 on Monday and goes up to $19 on Tuesday, your stock has appreciated. This is nice to know, but your stock might drop back down to $17 on Wednesday, or even fall below $17. These typical ups and downs shouldn't worry you if you're a long-term investor.
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Appreciation Over a Period
If you're looking at what your annual tax liability might be, you'll want to look at your stock's performance during your tax year. If your stock price goes up and down during the year, that won't concern you – it's only the first and last day of the year stock prices that determines your tax liability.
For example, if your stock was worth $17 on January 1 and ended December 31 at $19, your stock appreciated in value, you've made a capital gain and might need to pay capital gains tax (depending on what you do with your profits).
You can take the profits out of your account and pay capital gains tax, or leave the stock in your portfolio and pay no tax. Depending on when you take your profits, they are taxed as short-term or long-term capital gains. These rates are different, with long-term gains taxed at specific rates and short-term gains taxed at your personal income tax rate.
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Don’t Forget Dividends
Share price appreciation isn't the only way you can make money with stocks. Some pay dividends. Dividends are a share of a company's profits paid to investors, or shareholders. Getting dividends doesn't mean your stock share prices have appreciated, but if a company is profitable and paying dividends, its stock price usually increases.
Depending on how you've got your dividend stocks set up, you pay taxes on them in the year you earn them (unless you've got them in a tax-advantaged retirement account like an IRA). In order to increase their wealth, many investors reinvest their dividends back into their portfolios by using them to purchase more shares of the stock.