Appreciation

Appreciation is defined as the increase in value of an asset over time. It is the opposite of depreciation.

The appreciation of assets can be a funny thing. Due to inflation and other market forces, something that has increased in value can still end up yielding money with the same buying power.

For example, if something worth $100 appreciates in value by 7% over a year and is then sold at $107, if that year the inflation happened to be 7% as well then, the $107 will just have the same buying power as the $100 a year ago. If it happens to be a pretty bad year with inflation even higher, then the asset’s appreciation will not even cover the cost of inflation.

For this reason, it is important to factor in inflation when buying property for investment purposes. Note too that an asset’s value can fluctuate over time so that something that might appreciate today will depreciate in value tomorrow.

Though the term appreciation is often used to describe the increase in value of property such as land and buildings, currencies also experience appreciation and depreciation in a floating exchange rate. This is the reason why currency trading exists, to take advantage of the fluctuations in currencies’ values. During times when currency fluctuations become extreme central banks usually step in to help stabilize the currency. Note that while an appreciation in local currency may be a sign of a strong economy it can curtail export growth since other countries may find the products increased price prohibitive.

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