In economic terms, an asset is something you own of economic value. For instance, this can include real estate, or investments like stocks and bonds. Over time, the value of such assets can fluctuate depending on a multitude of factors.
When an asset experiences appreciation, that means that its monetary value will increase over time. This can be due to an increase of demand, or more people wanting the asset. It can also occur due to a decrease of supply, meaning that the amount of the asset being available for purchase is decreasing. Lastly, an asset’s value can appreciate when interest rates change.
On the other hand, asset depreciation is the exact opposite of appreciation. It is when the value of an asset decreases over time. Assets that lose value over time and end up losing functionality may be victim to depreciation. Some assets may have brief lifespans, or may become obsolete. Overall, an asset will lose value due to a loss in value or function, which will make it have less demand.
Some common instances where an asset may appreciate include stock and bond investments. In stocks, appreciation can be easily observable when a company’s success is projected or occurring. Many investors purchase stocks for dividends, and thus making an investment in a booming company would end up more profitable. The demand for the stocks of a certain company skyrockets as more and more investors want to purchase. This would then increase the value of the stock since so many investors want it, and thus the company raises the price to receive more money. Appreciation further occurs when the supply of a stock decreases; people would want to pay more for a stock that they find profitable and if it is going out of supply.
Depreciation occurs commonly with assets such as vehicles and machinery that function physically. This is due to the fact that such machines eventually break down over time. The more it is used, the more it is less pristine and thus less valuable. A prominent example is a car. If you purchase a brand new car, you use up its mileage and it experiences gradual wear and tear over time. This means that it may undergo problems and damages the more you use it, which is seen as a loss of value economically. Furthermore, newer models are continuously coming out that will beat even the latest model that you purchase, pushing it more and more into obsoletion.
In order to experience the best of appreciation and avoid depreciation, making careful financial choices is key. Especially as a teenager, it is ideal to make the most of your money. When investing, look for the most secure and successful companies to purchase stocks in, as you can receive profitable returns and even sell the stock for more if demand increases. Additionally, when it comes to things like cars, maybe buying a brand new model isn’t the way to go when you do not have much money. When you buy a used car, depreciation does not affect you as much since the first owner experiences the greatest effects of depreciation; this is why they sell it at a cheaper price due to the wearing down of the car over time.
In the end, it all comes down to your own personal decisions and what you think is right for you. It is your own money, and thus your own responsibility. If you are in the midst of purchasing an asset, look into appreciation and depreciation; it can benefit you greatly!
Written by Brian Caballo