Appreciation

In finance, the term appreciation refers to an increase in the price of capital and specifically an investment product.

Investments which you purchase – including securities, commodities, real estate and just about anything else for which there is a potential market demand – may gain or appreciate in value if the supply of that item in relation the demand decreases.

Example 1: You purchase 10,000 U.S. dollars for 0.95 centimes per dollar or 9,500 Swiss francs in total. Some time after, a boom in U.S. economic activity drives demand for U.S. dollars, pushing the value of the U.S. dollar to 1.05 Swiss francs. This results in an appreciation of your U.S. dollar investment from its initial 9500 francs of value to 10,500 francs of value – a capital gain of 500 francs or 5.26% on your investment.

Example 2: You inherit a house from your parents which – at the time of inheritance – is valued at 300,000 francs. Three years later, the opening of a new railway station near the house creates a demand for housing by potential residents attracted by the commuting possibility. The increased demand for housing in the area result in your getting a 350,000-franc offer for the property – an appreciation of 50,000 francs or 16.66%.

In the case of depreciation, demand for an item in relation to supply of that item decreases, resulting in a loss in the value of the item.

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