Accumulation | Definition, and Examples

Definition: Accumulation is the process of acquiring too much over time.

Examples of accumulation in a Sentence

  • The news article concludes that there has been a vast accumulation of evidence about the dangers of smoking
  • By using an independent third party to evaluate and recommend the best strategies, we can identify gaps in your existing accumulation strategies, allowing you to focus on what matters most.

What Is Accumulation?

Accumulation is the process of building up a position in an asset over a period of time. It can also mean adding assets to a portfolio over time.

The term “accumulation” is used in technical analysis to describe a shared increase in buying activity of a particular security.

Deferred annuities offer growth potential and guaranteed income, similar to mutual funds. You may purchase a deferred annuity with an accumulation phase and a distribution phase. The accumulation phase is the time where you make premium payments to grow your contract. The distribution phase is the period when you can begin to access your funds during retirement.

Understanding Accumulation

In economics, accumulation is the process of accumulating capital. Put simply; it is the adding up or buildup of wealth or making of money. By this definition, both individuals and groups (for example, a company) accumulate capital. The process involves buying things that add value over time and selling them later to increase profit.

Accumulation either refers to the process through which an investor buying a stock or other asset adds to their existing stake or the number of shares owned. Accumulation may be used as a strategy for lowering market impact, which is translated into fewer shares purchased at higher prices over a longer period of time.

Portfolio accumulation refers to investors adding positions to an existing portfolio. A seasoned investor or financial planner may use the proceeds from an inheritance, sale of a business, income from a second job, or any other source to create a new portfolio and grow their assets over time.

An accumulative approach to personal finance may allow you to grow your savings over time. By contributing incrementally, rather than saving all at once, you can potentially earn more interest on your money; while still having access to it if needed.

Example

Suppose you have $100,000 in your university endowment fund when you start investing. You could put that money in a trust and leave it there until you die.

That way, even if the market drops 10% from then on, your investment will still be earning (1000% per year) even if the S&P 500 SPX, +0.00%, drops 10%.

Using the Accumulation/Distribution (A/D) Indicator

The accumulation/distribution (A/D) indicator is an important stock-level alert that indicates whether a stock is being accumulated or not. When this occurs, the investor can use these prices as a guide to determine whether they should buy or sell the stock.

 However, this tool can also be used by technical analysts and fundamental analysts who observe the market using various indicators to determine to buy or selling action.

Computation of the Accumulation/Distribution (A/D) Indicator is based on the stock price and the transaction volume for each stock. It indicates whether the stock price is increasing or decreasing. If this increase or decrease is positive or negative, it indicates whether the investor increases or decreases their position in this stock. 

The calculation of the A/D indicator is based on the company’s total assets as of the end of the last report, broken down into Conditional Assets (that are included if specified conditions are met), Non-conditional Assets, and Net Worth (that are excluded if specified conditions are met).

The Accumulation/Distribution (A/D) indicator is a graphical representation of how much stock a company holds on behalf of its customers. As the price of an asset changes, so does the number of shares outstanding, but the act of selling (selling stock) doesn’t change the number of shares outstanding. 

So A/D can be used to track both aggregate sales and aggregate customer holdings over time. Using this indicator, you can determine whether the company is increasing its profit or losing cash flow while keeping the stock prices stable or rising over time.

Accumulation in Annuities

Accumulation in annuities refers to a person saving money while they are still gainfully employed. This money can be used to supplement retirement income or to help cover health insurance premiums.

An annuity is an investment product that uses a stream of payments or withdrawals to simulate the performance of an investment over time. Its purpose is to generate retirement income, which can be either immediate or deferred. If you’re looking for a retirement income stream, an annuity may help you generate a steady income.

Annuities are financial investments that allow investors to receive specific payments after a certain age. The older the investor, the larger the payments. Life insurance can accumulate money that will be paid later. Contributions are usually made monthly until a certain age, and then benefits are provided.

What Is Capital Accumulation?

Capital accumulation occurs when an investment generates further profit without having to contribute additional capital to the investment. It is defined as the profit earned on a particular investment minus any original contributions made to fund that investment.

For example, if a stock costs $10,000 and is now worth $20,000, the capital accumulation is $10,000.

What Is the Accumulation Phase?

The accumulation phase is the period when money is added to an account, such as an annuity, for earnings to grow. The contributions, plus any applicable earnings, then stay in the annuity fund until it’s time for distribution.

What Happens If an Annuitant Dies During the Accumulation Period?

If a named beneficiary survives the annuitant, they will receive the annuity’s accumulated value. If no named beneficiaries survive the annuitant, then the ownership of the annuity will revert to any previous owner.

In a nutshell, accumulation is the process by which wealth is accumulated, enabling an individual to enjoy greater wealth. In simplistic terms, accumulation is the achievement of wealth over what is needed for basic survival needs.