# Appreciation vs. Depreciation Explained: Key Financial Examples

## What Is Appreciation?

Appreciation is the rise in an asset's value over time, while [depreciation](https://www.investopedia.com/terms/d/depreciation.asp) is the decline in value as the asset ages or loses usefulness. Both concepts are essential in financial planning and investing because they help determine whether an asset is likely to generate profit or incur loss. Factors like demand, market conditions, and asset quality drive appreciation, while wear and tear or obsolescence often lead to depreciation.

For instance, cars depreciate quickly, influencing how much insurance coverage you might buy, while real estate and stocks are often evaluated for their potential to appreciate. Understanding and calculating appreciation rates can help investors make smarter decisions about when and where to put their money.

### Key Takeaways

*   Appreciation refers to an increase in an asset's value over time, while depreciation denotes a decrease in value.
*   Capital appreciation is the rise in value of financial assets like stocks, often sought alongside dividend income.
*   Assets such as real estate and precious metals typically appreciate, while vehicles and machinery tend to depreciate.
*   The appreciation rate, similar to CAGR, calculates the percentage increase in an asset's value over a specified period.
*   Understanding appreciation and depreciation helps in making informed investment decisions and affects financial outcomes.

## Factors Influencing Asset Appreciation

Appreciation can be used to refer to an increase in any type of asset, such as a stock, bond, currency, or real estate. For example, the term [capital appreciation](https://www.investopedia.com/terms/c/capitalappreciation.asp) refers to an increase in the value of financial assets such as stocks, which can occur for reasons such as improved financial performance of the company.

An asset's increased value isn't always realized by its owner immediately. The owner realizes the increase when they update the asset's value on financial statements.

Another type of appreciation is [currency appreciation](https://www.investopedia.com/terms/c/currency-appreciation.asp). The value of a country's currency can appreciate or depreciate over time in relation to other currencies.

> **Important**
>
> Capital gain is the profit achieved by selling an asset that has appreciated in value.

## How to Calculate the Appreciation Rate

The appreciation rate is virtually the same as the [compound annual growth rate](https://www.investopedia.com/terms/c/cagr.asp) (CAGR). Thus, you take the ending value, divide by the beginning value, then take that result to 1 dividend by the number of holding periods (e.g. years). Finally, you subtract one from the result. 

To calculate the appreciation rate, you need the investment's initial and future values. You must also know the duration of appreciation.

For example, Rachel buys a home for $100,000 in 2016. In 2021, the value has increased to $125,000. The home has appreciated by 25% \[($125,000 - $100,000) / $100,000\] during these five years. The appreciate rate (or CAGR) is 4.6% \[($125,000 / $100,000)^(1/5) - 1\].

## Key Differences Between Appreciation and Depreciation

Appreciation is also used in accounting when referring to an upward adjustment of the value of an asset held on a company's accounting books. In accounting, the most common adjustment is a decrease in value, called depreciation.

Certain assets are given to appreciation, while other assets tend to depreciate over time. As a general rule, assets that have a finite [useful life](https://www.investopedia.com/terms/u/usefullife.asp) depreciate rather than appreciate.

Depreciation is typically done as the asset loses economic value through use, such as a piece of machinery being used over its useful life. While appreciation of assets in accounting is less frequent, assets such as trademarks may see an upward value revision due to increased [brand recognition](https://www.investopedia.com/terms/b/brand-recognition.asp).

Real estate, stocks, and precious metals represent assets purchased with the expectation that they will be worth more in the future than at the time of purchase. By contrast, automobiles, computers, and physical equipment gradually decline in value as they progress through their useful lives.

## Real-Life Example of Capital Appreciation

An investor purchases a stock for $10 and the stock pays an annual dividend of $1, equating to a dividend yield of 10%. A year later, the stock is trading at $15 per share and the investor has received the dividend of $1.

The investor has a return of $5 from capital appreciation as the price of the stock went from the purchase price or cost basis of $10 to a current market value of $15. In percentage terms, the stock price increase led to a return from capital appreciation of 50%. The dividend income return is $1, equating to a return of 10% in line with the original dividend yield. The return from capital appreciation combined with the return from the dividend leads to a [total return](https://www.investopedia.com/terms/t/totalreturn.asp) on the stock of $6 or 60%.

## Real-World Example of Currency Appreciation

China's ascension onto the world stage as a major economic power has corresponded with price swings in the exchange rate for its currency, the yuan. Beginning in 1981, the currency rose steadily against the dollar until 1996, when it plateaued at a value of $1 equaling 8.28 yuan until 2005. The dollar remained relatively strong during this period. It meant cheaper manufacturing costs and labor for American companies, who migrated to the country in droves.

It also meant that American goods were competitive on the world stage as well as the U.S. due to their cheap labor and manufacturing costs. In 2005, however, China's yuan reversed course and appreciated 33% in value against the dollar. As of May 2024, it's still near that retraced level, trading at 7.2 yuan.

## What Is an Appreciating Asset?

An appreciating asset is any asset which value is increasing. For example, appreciating assets can be real estate, stocks, bonds, and currency.

## What Is Appreciation Rate?

Appreciation rate is another word for growth rate. The appreciation rate is the rate at which an asset's value grows.

## What Is a Good Home Appreciation Rate?

A good appreciation rate is relative to the asset and risk involved. What might be a good appreciation rate for real estate is different than what is a good appreciation rate for a certain currency given the risk involved.

## What Is Meant by Capital Appreciation?

Capital appreciation is the increase in the value or price of an asset. This can include stocks, real estate, or the like.  

## The Bottom Line

Appreciation and depreciation represent opposite movements in asset value, and both carry important implications for financial planning. Assets like real estate, stocks, and currencies often appreciate, while vehicles and machinery typically depreciate as they age and lose utility.

The appreciation rate, calculated much like the compound annual growth rate (CAGR), helps investors measure returns and evaluate whether an asset is worth holding long term. Market demand, inflation, and overall economic conditions all play a role in driving these changes.

For anyone managing assets, keeping track of appreciation and depreciation is essential to making sound investment choices and shaping effective long-term financial strategies.

> **Article Sources**
>
> 1.  Macrotrends. "[Dollar Yuan Exchange Rate - 35 Year Historical Chart](https://www.macrotrends.net/2575/us-dollar-yuan-exchange-rate-historical-chart)."