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Appreciation is when an asset, such as a house or collectible, grows in value as time goes by. This growth in value can happen for many reasons, including an increase in the item's desirability in the market or a reduction in supply. Appreciation is the opposite of depreciation, which is when the value of an asset decreases over time.
How Does Appreciation Work?
Assets, both intangible (brand recognition, patents and trademarks) and tangible (land, furniture and jewelry) can appreciate in value. Financial assets, such as stocks and bonds, real estate, certificates of deposit (CDs) and even your savings account, can appreciate—and in fact you may count on this for achieving your financial goals and having a nest egg for retirement. Not all assets appreciate in value, however, and there's no guarantee your assets will appreciate.
For instance, the value of your house may increase due to additional demand for housing in your area. If the current value of your home is higher than it was when you bought it, it has appreciated in value. If it stays the same or even decreases in value, it hasn't appreciated.
The goal of investing in assets like real estate or stocks is to buy when prices are low and see the value increase. In finance and economics, it's common to see two main types of appreciation: capital appreciation and currency appreciation.
In finance, the term "capital appreciation" is generally used with financial investments and assets that increase in value; for instance, stocks, mutual funds and bonds.
To determine how much an asset has appreciated, you'll simply need to know the difference between what the asset is worth today and how much you initially paid for it.
Let's say you spent $1,000 to purchase 50 shares of a new startup, Acme Electricity, at $20 per share. If the stock price increases to $25 per share, your initial 50 shares are now worth $1,250. In this example, the capital appreciation would be $250, or an increase of 25% above your initial investment.
In economics, the term "currency appreciation" refers to an increase in the value of one country's currency over another currency. Currencies can appreciate for several reasons, including a rise in inflation and interest rates or an increase in demand for domestic currency in a global market.
For instance, let's say that $1 has the same buying power as 0.8 euros. In this case, 1 euro is equal to $1.25 (1/0.8 = 1.25). So, if you wanted to buy something for 200 euros in France, it would cost you 200 x $1.25, or $250 to buy it.
Appreciation vs. Depreciation
Appreciation is an increase in the value of an asset. On the flip side, depreciation is the decrease in the value of an asset.
Assets such as vehicles and machinery with a finite usable lifespan are more likely to depreciate in value over time. If you bought a car for $30,000 five years ago, today that same vehicle may only be worth about $12,000—even less if it's in poor shape. In fact, the average five-year depreciation rate of vehicles in the U.S. is 50% of their initial value, according to a study by iSeeCars.
On the other hand, real estate, savings accounts and 401(k) retirement accounts often increase in value over time, or appreciate. Although the structure of your home will depreciate over time (because it needs new windows, a roof or paint, for example), typically the land it sits on will appreciate in value.
While some assets, like stocks, gold and silver, land, fine wine and rare artwork, can appreciate quickly, most assets gain value over a longer period of time. But even then, there are no guarantees.
The Bottom Line
Appreciation is the increased value of an asset over a period of time. Depreciation is just the opposite. Although asset appreciation isn't a given, there are parts of your financial health that are, such as your credit. To find out where you stand, you can access your free credit score and credit report at any time with Experian.