What Is Accumulation? How It Works in Finance and Example

What Is Accumulation?

In general, accumulation is to collect or increase the amount of something. In finance, accumulation can refer more narrowly to increases in the position size of an asset that is built up over multiple transactions. Accumulation can also refer to the overall addition of positions to a portfolio.

In technical analysis, accumulation points to a general increase in buying activity in an asset. In this case, the asset is said to be "under accumulation" or "being accumulated."

Deferred annuities have an accumulation phase in the first years of the contract. During this phase, savers are contributing funds. The accumulation phase is then followed by the distribution phase. During this phase, retirees begin accessing and using their funds.

Understanding Accumulation

Accumulation is a key concept in finance and economics because it underlies the concept of growth. For companies to increase profits (and increase their share prices), they must accumulate capital to expand and invest in new projects or businesses.

When a trader increases the size of their position over multiple transactions, they are accumulating the stock or other asset. A trader may want to accumulate a position over time, instead of all at once, to get a better average price, have a lower market impact, or attain information from multiple purchases.

Traders who take large positions attempt to limit their market impact by buying as covertly as possible. Buying too much at one time could cause the price to move up, thus increasing the cost of future purchases. Each transaction also provides information to the trader. If they place an order to buy and it pushes the price up easily, they know there are limited sellers. If they place a bid and it is instantly filled, they know there are sellers and they can likely buy more without pushing the price up.

Accumulation also refers to an investor or portfolio manager adding positions to a portfolio. In this sense, an investor is accumulating investments. As an investor contributes to their retirement portfolio over time, they may use the funds to buy additional stocks, commodities, and other assets.

When the price of a stock or other asset is rising, especially on rising volume, it is said to be under accumulation. This means that traders and investors are willing to buy the asset in mass. Once the asset starts to decline in value, this is called distribution. In this sense, accumulation refers to buyers that are more aggressive than sellers, which pushes the price up. Distribution refers to sellers that are more aggressive than buyers, which pushes the price down.

Example of Accumulation

It is possible that an investor could have multiple types of accumulation going on at one time.

Assume an investor is interested in purchasing PayPal Holdings Inc. (PYPL) as a long-term investment in their portfolio. The addition of this stock to others they already own would represent an accumulation in stocks; they are owning more over time.

The investor may also decide that they want to buy PayPal once they see others starting to accumulate it. This shows that the stock is in an uptrend and the price is moving higher.

The investor notes that the stock has broken through resistance in the $89 region and has been ascending since.

They initiate a purchase at $91. The stock price stalls, but then continues to move up. The investor buys more at $95. The stock continues to perform well, and they decide to buy more at $101.

This type of buying, which takes place over multiple transactions, is called accumulation. They didn't buy their position all at once. Instead, they spread it over multiple transactions which increased their position size in the stock over time.

Using the Accumulation/Distribution (A/D) Indicator

The accumulation/distribution (A/D) indicator, also known as the accumulation/distribution line, is an indicator that shows whether a stock is being accumulated or distributed. The A/D indicator uses an asset's price and volume to indicate the direction of its price or confirm trends.

The indicator is depicted as a line that seemingly follows an asset's price. However, it considers much more than the price. It is calculated using the A/D indicator from a prior period and money flow volume. An increasing line indicates an accumulation of an asset. Conversely, a decreasing line indicates a distribution of an asset.

The A/D indicator can signal bullish and bearish trends, as well as bullish and bearish divergence. When the A/D line increases and volumes are high, this confirms a bullish trend. When the A/D line decreases and the volumes are high, this confirms a bearish trend.

The A/D indicator can also signal when a reversal is on the horizon. When the A/D line decreases but the price follows a bearish price action, this is an indication of a bullish A/D divergence. Conversely, when the A/D line increases but the price follows a bullish price action, this is an indication of a bearish A/D divergence.

Special Considerations

Accumulation in Annuities

As it pertains to annuities, accumulation has an alternate definition. An annuity is a financial product that pays a fixed stream of payments to an investor. The primary use of an annuity is as an income stream for retirees. Annuities have two main phases: the accumulation phase, during which the investor funds the annuity, and the annuitization phase, after payouts begin.

Life insurance can also serve as an example of accumulation. Up to a certain age, the person may contribute a monthly premium to the insurance policy. After a certain age, they start to receive money or a payout.

Accumulation FAQs

What Is Capital Accumulation?

Capital accumulation is an increase in capital from investments. In other words, its the accumulation of value from an investment and is calculated as the current value of the investment minus the initial investment.

What Is the Accumulation Phase?

The accumulation phase is the period when contributions are made into an account, such as an annuity. The contributions and any applicable earnings accumulate until distributed.

What Happens If an Annuitant Dies During the Accumulation Period?

If the annuitant and owner are the same person, the accumulated value is paid to the named beneficiary upon death. If the annuitant is not the owner of the annuity, the owner retains full control of the annuity, receiving its accumulated value.

The Bottom Line

Accumulation is defined as the increase of something, such as the increase in value or quantity of something. Its specific definition varies according to how it's used and across different industries. For example, companies accumulate capital to fund projects and expand operations. Investors accumulate stocks and other assets over multiple transactions to obtain more favorable prices and minimize the impact on the market, and annuity owners accumulate value in their annuities by making contributions over time.