Paper Profit (Paper Loss)

AAA

DEFINITION of 'Paper Profit (Paper Loss)'

Unrealized capital gain (or capital loss) in an investment. It is calculated by comparing the market price of a security to the original purchase price. Gains or losses only become realized when the security is sold.

INVESTOPEDIA EXPLAINS 'Paper Profit (Paper Loss)'

Investors commonly justify bad investment decisions because of paper gains or losses. Two examples:


1. Although you officially recognize a transaction when you sell a security, many investors believe they haven't lost any money in a sinking investment because they haven't yet sold it. While you don't have a capital loss for tax purposes, there is a loss in value.


2. On the flip side, the dotcom boom saw many "paper millionaires;" created due to stock options. The problem was that rules in options contracts made it impossible for these people to sell their stock and realize their wealth. Consequently, after the dotcom market crashed, many paper millionaires went broke.

RELATED TERMS
  1. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  2. Puke

    A slang term describing the sale of a security or other asset ...
  3. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  4. Unrealized Gain

    A profit that exists on paper, resulting from any type of investment. ...
  5. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  6. Unrealized Loss

    A loss that results from holding onto an asset after it has decreased ...
RELATED FAQS
  1. What are unrealized gains and losses?

    An unrealized loss occurs when a stock decreases after an investor buys it, but he or she has yet to sell it. If a large ... Read Full Answer >>
  2. How are realized profits different from unrealized or so-called "paper" profits?

    When buying and selling assets for profit, it is important for investors to differentiate between realized profits and gains, ... Read Full Answer >>
  3. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  4. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  5. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
  6. What happens if a software glitch fails to execute the strike price I set?

    If you've ever suffered the frustrating experience of having an order not filled or had a strike price fail to execute because ... Read Full Answer >>
Related Articles
  1. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  2. Active Trading Fundamentals

    The Art Of Cutting Your Losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  3. Investing Basics

    Stashing Your Cash: Mattress Or Market?

    Pulling your money out of the market may help you sleep at night, but is it a smart move?
  4. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  5. Active Trading

    3 Reasons Not To Trade Range Breakouts

    Trading range breakouts is unprofitable for most novice traders; here are some alternatives that can be used.
  6. Investing Basics

    What is a Greenshoe Option?

    A greenshoe option is a provision in an underwriting agreement that allows the underwriter to buy up to 15% of the shares in an IPO at the offer price.
  7. Investing Basics

    What Does a Clearing House Do?

    A clearing house is a third-party agency or separate entity that acts as a go-between for buyers and sellers in financial markets.
  8. Options & Futures

    How The New NYSE Binary Options Work

    The New York Stock Exchange has launched its own version of binary options called Binary Return Derivatives Options or ByRDs.
  9. Mutual Funds & ETFs

    4 Ways You Can Invest In Gold Without Holding It

    Owning gold can be a store of value and a hedge against unexpected inflation. Holding physical gold, however, can be cumbersome and costly. Fortunately, there are several ways to own gold without ...
  10. Active Trading Fundamentals

    How To Short Amazon Stock

    With the stock reaching all-time highs and the company gambling on several new business lines, many investors may feel it's a good time to short sell Amazon.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!