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Unrealized income from securities - what you need to know about it?

Unrealized income from securities Julius Conley ★★★★★

When an investor buys shares, he wants to profit from them. But profit is real, and sometimes unrealized, or as it is also called - paper. Let's figure out what it is and how to minimize the risks in this case.

What is unrealized profit

Let's say you have 100,000 euros in your pocket and decide to invest in 1,000 shares of a promising company, each worth 100 euros. If the price of such securities increased by 30%, then your capital became 130,000 euros, since one share is sold on the stock exchange for 130 euros. In this situation, the unrealized profit is 30,000 euros. This means that until the investor has sold his shares and has not received income, until he has turned 30,000 euros on paper into real 30,000 euros in a bank account or in cash, then this is not a real profit. Therefore, it is also called "paper profit".

Profit Correction

At first glance, it may seem that if paper profits are converted into real ones, you will receive the same amount. This is a false statement. The actual profit, as a rule, will be less than paper. After all, if you sell shares on the stock exchange, you will need to pay tax fees, besides, the broker also takes a commission.

Profits and cryptocurrencies

So, we have already figured out that realized profit and paper are two different things. It is especially important to understand this for investors who are willing to risk capital or part of it and invest in companies with a low credit rating. Profit on such transactions can change very quickly, increase and decrease not only by 10% or 30%, but even by 300% or more.
For example, you bought a stock for $100 and it went up 200%. This means that you have a paper profit of $300, but you still cannot say that this money is in your pocket. Because the shares of a dubious company can very quickly fall in price and again cost $ 100, or even less. This means that a paper profit can become a paper loss or a real loss, it all depends on the market situation and your actions.
This rule also applies to cryptocurrency investors. After all, the growth of bitcoin, ethereum, USD Coin and other cryptocurrencies can immediately turn into a fall. So while you have not withdrawn the profit, you need to remember that it is only paper and can easily disappear.

How profit is predicted

All analytics, any calculations and forecasts, as a rule, are based on paper profits, because it is very difficult, if not impossible, to foresee all the factors that affect actual profits when it comes to long-term investments. Exchange rates may change, the commission may increase, the rate will jump, and it is even likely that some laws will change or new ones will appear in the near future.

Summing up

An investor must always understand that paper profits are not equal to real ones. And, of course, you should not invest all or a significant part of your capital in untested speculative instruments. Perhaps you will quickly make a paper profit, but in one moment it can evaporate and even become a loss.

We have compiled a list of brokers, that we recommend avoiding.

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