Accumulation (Finance) - Explained
What does Accumulation mean in Finance?
Written by Jason Gordon
Updated at September 6th, 2021
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Table of Contents
What does Accumulation mean in Finance? Accumulation in AnnuitiesAcademics Research on AccumulationWhat 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.
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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.
Academics Research on Accumulation
- Asset stock accumulation and sustainability of competitive advantage, Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management science, 35(12), 1504-1511. Given incomplete factor markets, appropriate time paths of flow variables must be chosen to build required stocks of assets. That is, critical resources are accumulated rather than acquired in strategic factor markets (Barney [Barney, J. 1986. Strategic factor markets: Expectations, luck, and business strategy. Management Sci. (October) 12311241.]). Sustainability of a firm's asset position hinges on how easily assets can be substituted or imitated. Imitability is linked to the characteristics of the asset accumulation process: time compression diseconomies, asset mass efficiencies, inter-connectedness, asset erosion and causal ambiguity.
- Economic growth and capital accumulation, Swan, T. W. (1956). Economic growth and capital accumulation. Economic record, 32(2), 334-361.
- Capital accumulation and economic growth, Kaldor, N. (1961). Capital accumulation and economic growth. In The theory of capital (pp. 177-222). Palgrave Macmillan, London. A Theoretical model consists of certain hypotheses concerning the causal inter-relationship between various magnitudes or forces and the sequence in which they react on each other. We all agree that the basic requirement of any model is that it should be capable of explaining the characteristic features of the economic process as we find them in reality. It is no good starting off a model with the kind of abstraction which initially excludes the influence of forces which are mainly responsible for the behaviour of the economic variables under investigation; and upon finding that the theory leads to results contrary to what we observe in reality, attributing this contrary movement to the compensating (or more than compensating) influence of residual factors that have been assumed away in the model. In dealing with capital accumulation and economic growth, we are only too apt to begin by assuming a given state of knowledge (that is to say, absence of technical progress) and the absence of uncertainty, and content ourselves with saying that these two factors technical progress and uncertainty must have been responsible for the difference between theoretical expectation and the recorded facts of experience. The interpretative value of this kind of theory must of necessity be extremely small.
- Optimum growth in an aggregative model of capital accumulation, Cass, D. (1965). Optimum growth in an aggregative model of capital accumulation. The Review of economic studies, 32(3), 233-240.
- Toward a theory of role accumulation, Sieber, S. D. (1974). Toward a theory of role accumulation. American sociological review, 567-578.