Realised profit / loss definition
Realised profit/loss
A realized profit or loss occurs when an investment is sold for a higher or lower price than purchased for, and it is only recognized once the transaction has been made. A realized profit is also known as a realized gain and only becomes liable for capital gains tax at this point.
For example, if an investor buys 1000 shares at $5 each and sells when the shares reach a market value of $8, they will have a realized profit of $3,000 ($8,000 -$5,000). Conversely, if the shares dropped to $2 each and sold, they would have a realized loss of $3,000 ($2,000 - $5,000).
Unrealized profit/loss
An unrealized profit or loss represents the current value minus the original investment price. They are also known as "paper profits or losses" because they remain theoretical until sold.
Investors use unrealized profits to calculate the value of their portfolios. Securities that are 'held to maturity’ are not directly included in the financial statements, but those 'held for trading' are recorded on the balance sheet with a fair value assigned.