Unrealized gains and losses refer to the change in value of an asset that is still being held (unsold).
If an asset’s market value has increased, compared to its value when it was bought, but the owner still has not sold the asset, the increase in the asset’s value is considered to be an unrealized gain.
If the asset’s price decreases compared to its original price, then the loss in value is considered to be an unrealized loss. As soon as the owners sell that asset the unrealized gain/loss then becomes a realized gain/loss.
Unrealized gains and losses are very common in the stock market. Investors who do not sell stocks though the stock price as increased does it to take advantage of further increase in the stock’s worth.
Investors who do not sell stock whose value has plummeted, on the other hand, do so in the hopes that the stock price will go up in the future and so mitigate the unrealized loss or even result in an eventual gain.
Investors who sell stocks whose price have plummeted are forced to do so when they believe that the prices will plummet further and so sell before the losses become too great.
Unrealized gains and losses are also called paper gains and losses, since they reflect on paper and can increase an individual or company’s net worth. However, a paper gain and loss will not really affect an individual’s standard of living, at least until the asset is sold.
