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Appreciation refers to an increase in the value of an investment.How It Works/Example:
Let's assume you purchased one share of Company XYZ stock for $5. If that share's value increased to $7, we would say the investment has appreciated by $2.
Why It Matters:
Appreciation is the end goal for most investors. It is the founding principle upon which nearly every investment strategy rests. However, there are responsibilities attached to appreciation. Most notably, appreciation is often taxed, meaning that when that Company XYZ share appreciated by $2, the investor may end up with only $1.60.
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Capital appreciation (also called a capital gain) is an increase in the value of an investment. It is the difference between the purchase price (the basis) and the sale price of an asset. Thus the formula for capital appreciation is:
Sale Price - Purchase Price = Capital Appreciation
Note that this formula assumes the sale price is higher than the purchase price. If an investor sells an asset for less than he or she paid, this is called a capital loss.
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