Appreciation definition

Appreciation describes an increase in asset value during the holding period, or over time in general

Appreciation definition                                 

What is appreciation?

Appreciation means an increase in asset value. Expectations about appreciation are the reason why investors buy and hold an asset: the increase can generate a positive return. 

The value of financial assets increase because of changes in demand and supply. A higher interest in a security could put upward pressure on its price since there is only a limited amount of that security. Also, a decrease in the supply in the market would increase its price.

The stock price can also appreciate when the company makes higher earnings or when there is an announcement that positively impacts the company outlook. For example, announcements for dividends payout, new products, mergers and acquisitions.

Appreciation can also happen because of changes in economic factors such as inflation, interest rates, economic outlook, or changes in the exchange rate.

Appreciation explained

Different types of assets, such as stocks, real estate, or collectibles, can appreciate during their lifespan or holding period. Depending on the asset, there are several types of appreciation.

Capital appreciation occurs when the price of a security increases. The investor records a capital gain calculated as the difference between the sale price and the purchase price.

Currency appreciation refers to the increase in the value of one currency against the value of another currency.

Appreciation in accounting records an upward adjustment of asset value recorded on the financial statements. In general, businesses are dealing with depreciation or a decrease in the value of fixed assets. But there could be instances when the asset value has appreciated. The appreciation is recognised when it occurs because of economic factors.

Appreciation examples

Let's assume that the current stock price of company A is €12 (£10.80, $13.60). The company announces higher than expected earnings at the end of the year. This will be perceived as positive news, since earnings will increase the value of the company. After the announcement, the stock price is valued at €15. It can be said that the stock value has appreciated by €3. It should be noted that this is an unrealised gain for the stockholder. The investor will make a profit of €3 per stock if the stock is sold at €15.

Collectibles are items that are expected to appreciate over time because of their limited supply in the market. Collectible items can be rare coins, specific car models, art and antiques.

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