What is ‘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.
Explaining ‘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.
Further Reading
- Profit-Loss Sharing Model for External financing – ideas.repec.org [PDF]
- The entrepreneurial role of profit‐and‐loss sharing modes of finance: Theory and practice – www.emerald.com [PDF]
- Do global banks spread global imbalances? Asset-backed commercial paper during the financial crisis of 2007–09 – link.springer.com [PDF]
- Sensationalism, newspaper profits and the marginal value of Watergate – onlinelibrary.wiley.com [PDF]
- GENERAL REGULATORY FRAMEWORK IN RASTIN PROFIT AND LOSS SHARING BANKING:: PART III-AUXILIARY PROVISIONS – ssbrj.org [PDF]
- Failure and potential of profit-loss sharing contracts: A perspective of New Institutional, Economic (NIE) Theory – www.sciencedirect.com [PDF]
- Fear and greed in financial markets: A clinical study of day-traders – pubs.aeaweb.org [PDF]
- 1988 Competitive Manuscript Award: Did Firms Undertake Debt-Equity Swaps for an Accounting Paper Profit or True Financial Gain? – www.jstor.org [PDF]
- The effects of multinationals' profit shifting activities on real investments – www.jstor.org [PDF]
