How Accumulation Works

The general meaning of accumulation is an increase in the amount of an item. You will often hear individuals say, "I have an accumulation of stuff at my house." While we use the word accumulation in daily conversations, it is also used in the financial world having to do with stock buying. When financing, accumulation refers to the size of an asset's position, which increases after several transactions.

Accumulation can also refer to the addition of various portfolio positions. There is an accumulation of assets like stock when a trader starts to increase the size of positions with multiple transactions. Instead of accumulating a position in a single day, the trader might opt to do so over a longer period. Some of the reasons why a trader might opt to do this include:

  • To have a lower impact on the market.
  • To gain more information after multiple purchases.
  • To get a favorable average price.
  • To avoid others seeing an increase in stock purchasing.

Most traders who purchase large stock positions tend to secretly buy stock to avoid impacting the market. The price can abruptly increase if there is too much buying at a particular time. The trader can also get information from every transaction taken. A limited seller is a trader who places a buy order, and the price is easily pushed up.

Example of Accumulation

James is an investor and is interested in buying PayPal Holdings Inc. He wants it to be a long-term investment in his portfolio, purchasing a few shares at a time. The investment of the stocks is an addition to the others that James already owns. Therefore, this is an accumulation of stocks.

James talks to his friends at work about his plan to slowly grow his portfolio. His friends, other investors might buy the PayPal stock once they see the benefit in accumulating stock. With more investors buying the stock, there will be an uptrend in the PayPal stock resulting in a price increase.

James notes the resistance of the stock has broken at $50. From this point, the price of the stock has continued to ascend. After noting this, James starts to buy at $52. The stock price continues to ascend, and he decides to buy again at a higher price, now at $63. Nevertheless, the stock price continues to move up, and he buys again at a higher price of $68. This process is known as accumulation. James completed the transactions at different price positions for the stock, increasing his stock size with time.

Significance of Accumulation

When you, as an investor, continue to accumulate investments, you continue to contribute to your portfolio over time. As an investor, you can use the funds to buy commodities, additional assets, or even stocks. The purchase of stock may decline, making the price steady, or it may even fall. Buyers become less aggressive when the stock prices are stable.