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Unrealized Profit

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An unrealized profit is a potential profit that has not yet been effected, i.e., a paper profit. Suppose an investor buys 25 shares of stock at $2 each on October 14. On October 22, the price is $3 per share. The unrealized profit is 25 x ($3-$2), or $25. An unrealized profit is ordinarily not taxed until the stock is sold and the profit realized. From the standpoint of investor psychology, though, an unrealized profit can pose problems: if the shares subsequently decline, some investors won't sell the stock until the price is again $3 and they have the same unrealized profit. In this way, an unrealized profit penalizes investors who refuse to cut their losses. However, an unrealized profit ordinarily poses fewer issues for auditors of financial statements than an unrealized loss. Because of the principle of conservatism, an unrealized profit on, say, land, won't be recorded -- the land continues to be carried at historical cost. Note that unrealized profit is often called an unrealized gain.



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