Appreciation

Financial Dictionary -> Investing -> Appreciation

Appreciation (the opposite of depreciation) is the measure of a continued rise in the worth of an asset. In other words how an asset (whether that be a house, a product or a market) has gone from its initial value to a higher value. For example you may have bought your house in the 1980s and it has appreciated in value ever since. Of course in some economies it may have lost its value. In the property market causes of appreciation usually occur because of inflation.

It is hard to measure the level of appreciation and it is often an estimate of an Assets worth, rather than a solid figure. It is more common for a business to experience depreciation of assets, such as machinery that will lose its worth over the years and will be sold on for a lower price at a later date. This all counts towards a business's finances.

Appreciation also occurs in currency and the exchange rate. If the value of a currency goes up, then so does consumer spending and business, thus inflation "or the cost of prices" also goes up to keep the economy stable. As mentioned, inflation often occurs in real estate as the cost of houses rise each year. This doesn't always mean you are making a profit because the value of currency may be less.

Appreciation is also commonly used on the stock market as one of the measures applied to shares and their values. For example if you bought 100 shares of a company at $20 five years ago and now they are worth $40 then they have increased and shown appreciation.

In this case to calculate appreciation you would do the following sum:

($40 - $20) x 100 shares = appreciation of $2000

This is important for understanding how much your shares have increased if you are looking to sell them on for a profit. This obviously needs to be weighed up with your yearly dividend and various other factors.

Appreciation is a simple concept to learn and can simply be described as an increase in value of an asset.