What is Appreciation?

In business and economics, the term “Appreciation” refers to the increase in value of something such as a real estate property, currency, antique, or gold.

In everyday usage, appreciation is the act of thanking, recognizing, acknowledging, or understanding that something is important or valuable. If I say: “I sent them a gift in appreciation for all their help,” it means that I let them know that I acknowledged their help – I was expressing my gratitude.

This article focuses on the meaning of the word when used in a business, finance, or economics context. In business, appreciation has a precise, quantifiable connotation.

The Corporate Finance Institute has the following definition of the term:

“Appreciation is an increase in the value of an asset over time. The term is widely used in several disciplines, including economics, finance, and accounting. Appreciation is the direct opposite of depreciation.”

Why does appreciation occur?

Things can appreciate, that is, go up in value, for a variety of reasons.

  • Real estate

A property may appreciate because of improvements in the area, such as the construction of a new school, a new major employer, the construction of a tunnel, or other infrastructure.

  • Currency

If a country’s economy is seen as stable and strong, its currency will tend to appreciate against most other currencies. Currencies that have a history of maintaining their value or rising in value in the world market are known as hard currencies.

Illustration of currencies, coins, rising graphs, and property depicting the concept of appreciation
Image created by Market Business News.
  • Investments

For investors, appreciation is an important component of the return on investment or ROI. It is the part of the ROI that comes from the investment itself becoming more valuable, and not just from the interest, rent, or dividends it generates.

  • Antiques

Genuine antiques tend to go up in value over the long term because they are sought after – there are always plenty of buyers.

Appreciation is the result of market forces, that is, the forces of supply and demand. When the demand for something rises, but the supply either remains the same or declines, its value rises – it appreciates.

If demand for something falls, or its supply rises faster than demand, its value falls – it depreciates.

Appreciation not guaranteed

If you are thinking of becoming an investor, it is important to remember that appreciation is not guaranteed. Shares, commodities, and property, for example, may also depreciate due to economic downturns, a new law, changes in demand, trade wars, or deteriorating conditions.

As an investor, you need to carefully consider the potential for both appreciation and depreciation when evaluating an investment opportunity.

Summary

Appreciation is a fundamental economic concept that denotes a rise in the value of something over time. It is driven by myriad factors and has important implications for national economies, financial markets, businesses, and individuals.