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Paper Profit

POSTED ON December 23, 2019

How finance folk use it

So you have an investment whose value is now higher than when you bought it. This is called paper profit, because you have made money “on paper.” When you sell the investment at the higher price, the profit becomes actualized and your gains become real.

In the same way, paper loss is what happens when an investment’s current value is lower than the amount you spent to buy it. It only becomes an actual loss when you sell it at the lower price.

Is it good or bad?

Paper profit is potentially good, because it means that you have a real opportunity to gain money. However, consider all the effects of selling. There is a chance that the market price will continue to rise, so selling now will get you less profit than if you do it after a few weeks.

If you have invested in bonds, remember to also factor in the value of the coupons (both those received and those you will no longer get) to see if you really will come out ahead by selling.

There is also the possibility that market conditions will shift and cause the value of your investment to drop in the future. If this happens, you might only break even at best, and or even experience a loss.

What it means for you

The gains of paper profit become real only when you sell the investment at that moment. Conditions may change and the value may rise more or even drop, so you’ll have to think of your next step.

One thing you should do is look at the factors behind the increase in value. If they are likely to stay that way, the price of the investment might go up more. In that case, holding for a little while longer might be better.

Before making your decision, do the math to see the whole picture, especially if your investment is in bonds. Sometimes, what looks like profit may actually not be that.