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Paper profit refers to an increase in the market value of an asset, resulting in a difference between the original value and the current value. It is not a real profit until the asset is sold for a price close to the increase, minus fees and taxes. Some investors may miss out on opportunities to make a profit if they do not sell their assets at the right time.
Paper profit is a term used in reference to a situation that could arise as part of investing when there is an upward revision to an asset, which may be the result of an appreciation in the market value of the asset in question . When people make investments, something that may be in the form of a stock or some other definite type of asset, it is for a verifiable amount of money. Even when people inherit the asset or security, it usually has a market value at the time they inherit it. Over time, changes may occur in the market which may lead to a situation where the value of assets will rise or fall, leading to a difference between the value of the item under consideration at the time and the value of the same item at the time the time the owner bought or inherited it. It is this upward appreciation in the value of the item that is known as paper profit because the profit is on paper only and has not been converted into physical cash by the owner.
The owner of the asset can decide to convert it into a real profit only when that person manages to sell the object for a price close to the increase. In that case, the profit will be what’s left over after the original market value has been subtracted from the total sale price, including taxes and other fees. An example of this can be seen in a situation where an investor buys some stock in a computer company for a reported amount. If after two years the market value of the stock suddenly increases and the investor’s stock experiences an upward increase of 40%, the 40% increase in the value of the stock will be the paper’s profit. This paper profit will be converted into real profit when the owner of the stock sells the stock and realizes at least 30 to 35 percent after subtracting fees and taxes.
While the concept sounds good, some investors have found it a stumbling block in their quest to maximize their investment returns. For example, assuming the reason the computer company’s stock soared so high was due to a new product that generated a lot of interest, some investors might decide to convert paper profit into real profit by selling the stake, while others may not, thinking the stock value will continue to rise. Assuming that doesn’t happen, investors would have missed out on a valuable opportunity to make a healthy profit.
Smart Asset.
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