What it is:
Appreciation is an increase in the value of an investment.
How it works (Example):
Note that even though the investment has appreciated by $2, you will not benefit unless you sell the stock and put $7 back in your pocket. If you do not sell, the appreciation is often referred to as “paper profit.”
Why it Matters:
Appreciation is the end goal for most investors. It is the founding principle upon which nearly every investment strategy rests. However, to realize the benefits of appreciation, the investment asset must be sold. This is generally considered a taxable event, meaning taxes will be due on some or all of the gains.