Accumulation (Finance) - Explained
What does Accumulation mean in Finance?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What does Accumulation mean in Finance?
In finance, the term accumulation has a variety of meanings, they include the following; Accumulation is a situation whereby an investor builds up capital in a company through cash contributions (investment) towards the company. In this situation, investors allow their cash contributions in a company to accrue by reinvesting their dividends and capital gains. The major goal of this accumulation is to create a good investment portfolio. Also, the purchase of a large number of shares over a long period of time is accumulation. This is an increase of investment by a continuous or repeated purchase of shares for an extended period of time. Accumulation also refers to a method of putting money or profit in reserve for investment purpose. This is otherwise called retained earnings where a company retains it profits rather than paying it as dividends to shareholders.
When an investor continuously give cash contributions to a company in order to create a desired investment portfolio, the investor is said to be accumulating wealth. This accumulation phase entails the reinvestment of profits or dividends so as to have an accrued wealth in the company. Individual investors are not the only ones that go through accumulation phase, large or institutional investors also experience the same. For large investors, accumulation is when large shares are purchased over a long period of time. Since large shares cannot be easily moved in and out of securities, they are allowed to accrue. In addition, a company can accumulate wealth by reinvesting its profit instead of paying it as dividends to shareholders.
Accumulation in Annuities
In annuity, accumulation phase is a period when an investor funds an annuity, the purpose of this is to build up the cash value of the annuity to a desired level. The accumulation phase is the early stage of annuity, when the investor build up cash, this phase must be completed before the annuitization phase can begin. In the accumulation phase, investors add value to the annuity by depositing money or fund in it.