Unrealized Gain
Candlefocus EditorIn the context of businesses, unrealized gains indicate an increase in the value of an investment made in another company, such as stock, bonds, or even real estate. For example, if a company buys a million shares of stock at $10 each and then a few months later the stock is at $20 each, the company has a paper profit of $10 million. If the stock is sold at this point, the profit is then realized and the company will be able to pay taxes on its profits.
However, unrealized losses can occur if the stock went down in value from the time it was purchased to the time it was sold. For example, if the company purchased the stock at $10 and then later on it had dropped to $8, the company would have an unrealized loss of $2 million.
When it comes to personal investing, unrealized gains refer to the theoretical gains that an investor can make if he or she holds onto an asset for a given period of time. For example, if an investor has purchased a share of stock at $10 and it rises to $20, the investor has a paper gain of $10.
The key difference between an unrealized gain and a realized gain is timing. An unrealized gain is a theoretical profit that exists on paper until the asset is actually sold for cash. In the example of the single share of stock, if the investor decides to hold onto the stock until it falls back to $10, the theoretical gain of $10 is no longer there and the investor has realized no actual gain.
Another factor to consider is taxes. Once the stock is sold and the realized gain is accumulated, taxes on the profits must be paid. If the investment has been held longer than one year, the gain would be taxed at the capital gains tax rate, which is typically lower than the income tax rate.
Unrealized gain is an integral part of financial management for both businesses and individuals, providing a useful metric for evaluating the success and profitability of investments. Knowing how to use unrealized gains to your advantage can help to maximize profitability and minimize taxes.