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Appreciation is a financial term you need to know. Bankrate explains.

What is appreciation?

Appreciation, or capital appreciation, is an increase in the price or value of an asset. Appreciation occurs when the market value of an asset is higher than the price an investor paid for that asset. It can refer to an increase in value of real estate, stocks, bonds, or any other class of investable asset. Capital appreciation is the portion of an investment excluding the original cost basis of the investment.

Deeper definition

An asset is an item of value that you expect will provide future benefit. For most people, this benefit is usually an increase in the item’s value, which is appreciation. In order to experience appreciation, an investor needs to hold an asset for a period of time.

Assets also experience losses in price or value, which is known as depreciation. The price or value of all assets fluctuate over time; however, the most basic principle of investing is that all other things being equal, the value of assets usually appreciate over longer time spans.

National currencies also appreciate or depreciate against other currencies. Driven by currency market dynamics and the economic performance of individual countries, currencies constantly fluctuate in value against one another.

Appreciation example

An investor purchases a home for $150,000; this figure is also the present value of the home. Shortly after the investor buys the home, property values experience a temporary decline, reducing the market value of the home to $140,000. Over a period of a few years, property values increase again and the home is worth $165,000. The increases and decreases in the home’s value represent appreciation and depreciation.

Want to make sure that your 401(k) appreciates in value? See how changing your contribution rate can help your balance grow.

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