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Paper Profit

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A paper profit is a unrealized gain on a security or asset. For example, suppose 10 shares of Acme stock are bought at $8 and two months later the stock is selling at $12. The paper profit is (10X12)-(10X8), or $40. If the stock was sold, the paper profit would become a realized profit. A paper profit is just that - a profit on paper only - and should never be confused with a tangible gain. First, a paper profit is usually reduced significantly by both taxes and transaction costs upon realization. Moreover, a paper profit can become an important psychological obstacle to successful investing. Suppose Acme falls back to $10 and part of the paper profit disappears. Some investors will find it hard to sell the shares until they climb back to $12 and the full paper profit re-emerges. In this way, an historical paper profit can make an investor hold a stock too long and forego better investment opportunities.



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