Depreciation

In finance, the term depreciation refers to a decrease in the price of an investment product or other capital.

When you purchase an investment vehicle at a given price, the investment may appreciate or depreciate in value.

In the case of depreciation, demand for the item which you purchased decreases in relation to its availability. As a result, its value decreases. If its value does not appreciate at a later date, you will incur a capital loss.

Example 1: You purchase a classic car for 30,000 Swiss francs as an investment. Shortly after the purchase, an importer ships 15 identical cars into the country. Due to the increased availability of the product in relation to the number of buyers who are interested in that make of car drives offers down to 26,000 francs, resulting in a 4000-franc depreciation in the investment’s value.

Example 2: You purchase 1000 shares in a company’s stock for 25 francs per share or 25,000 francs in total. Some time after, rumors of mismanagement cause many investors to lose faith in the company and offer their shares up for sale. The flood of shares on offer and lack of demand from buyers results in a 5-franc depreciation of the value of each of your shares, or a 5000-franc depreciation in the value of your full investment.

In the case of appreciation, demand for the item which you purchased increases in relation to its availability. As a result, its value increases, resulting in a capital gain.

More on this topic:
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