Understanding unrealised profit and unrealised loss is critical for making informed decisions when investing or trading in the stock market. These concepts reflect the potential gains or losses in your investments before you sell, helping you decide whether to hold, sell, or adjust your portfolio. This article explains unrealised profit and loss, how they differ from realised gains, and strategies for managing them effectively.
Unrealised profit, often called a "paper gain," occurs when the current market value of an investment exceeds its purchase price, but you haven’t sold the asset. It represents the potential profit you could make if you sell at the current price. For example, if you buy a stock at ₹100 and its market price rises to ₹150, the ₹50 difference per share is your unrealised profit, as long as you continue to hold the stock.
Conversely, an unrealised loss, or "paper loss," occurs when the market value of an investment falls below its purchase price, and you haven’t sold the asset. This reflects a potential loss you would incur if you sold at the current price. For instance, if a stock bought at ₹100 drops to ₹80, the ₹20 per cent difference per share is your unrealised loss until you sell or the price recovers.
The key distinction between unrealised and realised gains or losses lies in whether the asset has been sold:
Aspect | Unrealised Profit/Loss | Realised Profit/Loss |
Definition | Potential gain/loss while holding an asset | Actual gain/loss after selling an asset |
Transaction | No sale; no cash involved | Sale completed; cash and securities exchanged |
Terminology | Often called "paper gains" or "paper losses" | Actual profit or loss |
Market Impact | Fluctuates daily with market prices | Fixed at the time of sale; unaffected by market |
Tax Implications | No tax liability until sold | Subject to capital gains tax based on holding period |
The formula for calculating unrealised profit or loss is straightforward:
Unrealised Profit/Loss = (Current Market Price × Number of Shares) - (Purchase Price × Number of Shares)
Example Calculation
Suppose you purchased 1,000 shares of XYZ Ltd. at ₹100 per share on January 1, 2025. By July 1, 2025, the market price rises to ₹150 per share. Your unrealised profit is:
Unrealised Profit = (1,000 × ₹150) - (1,000 × ₹100) = ₹150,000 - ₹100,000 = ₹50,000
If, by October 1, 2025, the price drops to ₹90 per share, your unrealised loss is:
Unrealised Loss = (1,000 × ₹90) - (1,000 × ₹100) = ₹90,000 - ₹100,000 = -₹10,000
These values fluctuate until you sell the shares, at which point they become realised gains or losses.
Unrealised profits and losses are critical for portfolio management and tax planning. Here are key strategies to leverage them:
Imagine you bought 500 shares of ABC Ltd. at ₹200 per share (total cost: ₹100,000) on March 1, 2025. By September 1, 2025, the price rises to ₹250, yielding an unrealised profit of:
(500 × ₹250) - (500 × ₹200) = ₹125,000 - ₹100,000 = ₹25,000
If the price later drops to ₹180 by December 1, 2025, you face an unrealised loss of:
(500 × ₹180) - (500 × ₹200) = ₹90,000 - ₹100,000 = -₹10,000
If you sell at ₹180, the ₹10,000 loss becomes realised, potentially offsetting other gains for tax purposes. If you hold, the loss remains unrealised, and the value may recover or decline.
Unrealised profit and loss are dynamic indicators of your investment’s performance, reflecting potential gains or losses before a sale. You can make informed decisions about holding, selling, or rebalancing your portfolio by tracking these metrics. Strategic management of unrealised gains and losses, combined with tax planning and market analysis, empowers investors to optimise returns and mitigate risks in the ever-changing stock market.