What is Appreciation?

By Michael Thorburn

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Appreciation is the increase in value of an asset as a result of stronger demand, weakening supply or economic changes such as inflation.

Appreciation is the opposite of depreciation, which relates to the decrease in the value of an asset.

How appreciation works

Stocks, bonds, currency and real estate can all show appreciation, meaning that their value can increase over time. Capital appreciation is the increase in the value of financial assets such as stocks, this increase can occur as a result of the improved financial performance of the company.

For example, an investor buys a stock for $100 and the stock pays an annual dividend of $10, a dividend yield of 10%. 12 months later the stock trades at $150 per share and the investor receives their $10 dividend.

The investor has a capital appreciation of $50, which is a return from capital appreciation of 50%. The total return of the stock is calculated by adding the capital appreciation amount and the dividend amount together. In this example, it would be $60 or 60%.

When an asset appreciates, its owner does not automatically realize the increase, they would need to revalue the asset at its appreciated price on their financial statements to show the realization of the increase.

Very similar to the compound annual growth rate, the appreciation rate is calculated to show the rate at which an asset has appreciated or in other words the rate it has grown. This can help investors determine which of their investments have the best growth rate.

What else do you need to know?

Tax advantages

Taxes on capital appreciation aren’t due until you sell the investment and actually realize the gain. Upon selling the stocks you would then be liable for capital gains tax on the amount your investment had increased by.

Grows capital

The primary objective of any investment, unless you are shorting the market, is to make gains. Capital appreciation fuels gains growth and expands your investment pot so you can make bigger or more varied investments in the future.

Gains are only on paper

As capital appreciation gains aren’t realized until the investment is sold, they only exist on paper. This means that a crash on the stock market could deplete any gains before you have the opportunity to realize them or could fall so much that the assets are worth less than the share price you bought them at.

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Author: Michael Thorburn

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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