Paper Profits Definition
Paper Profit & Paper Loss is an art of satisfying oneself as one is only making mental profit or loss as it is an unrealized capital gain (or capital loss) in an investment. One is able to perform this act just by mentally calculating by comparing the market price of a security to the original purchase price. This concept is hazardous for a trader as gains or losses only become realized when the security is sold.
Why You Should Avoid Paper Profit & Paper Loss?
A habit of paper profit and paper loss makes investors justify their bad investment decisions because of paper gains or losses and they ultimately get married to loss making trades.
Paper Profit Loss
Please have a look at two examples which explains the habit of Paper Profit & Paper Loss and how it affects a trader or an investor:
- 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.
- 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.
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