What Is Unrealized Profit & Loss?
Unrealized profit and loss occur when you have a position open in a security that has appreciated or depreciated in value. This is also known as paper profits or losses because you don't actually realize these gains until you sell the security.
Unrealized profit or loss results from holding a particular investment position, but which is not realized until the position is sold. Unrealized profit or loss is also referred to as paper profit or loss. Its calculation can be used to determine the current value of any investments held. If the value is greater than the original purchase price, it is an unrealized profit. Conversely, if the current value of an asset is less than the original purchase price, it is an unrealized loss.
Unrealized Profit and Loss Example
To illustrate, assume an investor purchases 100 shares of Company XYZ for $50 per share (a $5,000 investment). After holding the stock for 10 years, it has increased in value to $100 per share. The unrealized profit on this investment would be:
100 shares x ($100 - $50) = $5,000 unrealized profit
It’s a profit or loss that has occurred on a commodity contract, futures contract, option contract, or any other financial instrument but has not been "realized" because the position is still open.
For example, if you buy EUR/USD at 1.2510 and it is now trading at 1.2600, the trade has made 90 pips in your favor (1.2510 - 1.2600 = -0.0090 = 90 pips). However, you have not yet closed this trade and, therefore, this profit is unrealized — it can turn into a loss if the market moves against you and you decide to close the trade at a lower price (1.2600 - 1.2700 = -0.0100 = 100 pips loss)
Unrealized profit and losses are typically tracked as part of the mark-to-market accounting process. Trading needs continuous attention. This is especially true of day traders, who tend to trade as much as they can during the market’s opening hours – or even after hours. And when you trade a lot, it’s only natural that some of your trades will end up being profitable, and others unprofitable.
If you keep a track of how much money you make on each trade, this is what’s known as your realized profit and loss (or P&L). But you can also track your unrealized profit and loss.
Traders often focus on their realized P&L because it represents real (i.e., realized) gains or losses that can be used for tax purposes and reinvested in future trades. Unrealized P&L does not impact taxes or account balances.
However, a seasonal investor or trader never makes the mistake of thinking that it isn't important.
