Paper Profit and Loss

A paper profit – also called an unrealised or book profit – is the gain that an open position currently shows but that has not yet been realised. A realised profit only arises when the position is closed at a profit. Likewise, a paper loss is the current loss of an open position that has not yet been realised. It only becomes a realised loss when the position is closed at a loss.

Example

A trader buys 200 shares at $40. If the price rises to $45, the position shows a paper profit of $1,000 (200 × $5). As long as the position stays open, this amount can grow, shrink or even turn into a loss. Only when the trader sells the shares at $45 is the $1,000 profit realised. Had the price fallen to $37 instead, the position would show a paper loss of $600 – which would likewise only be realised on closing.

Why it matters for traders

Trading platforms usually show paper profits and losses as "floating" or "unrealised P/L" and update them with every price change. In leveraged forex and CFD trading, they have a direct effect on account equity: a growing paper loss reduces the free margin and can lead to a margin call, even though no trade has been closed yet.

Paper results also have a psychological side. Many traders find it hard to close a losing position and turn a paper loss into a realised one, while they tend to take paper profits too early – a pattern studied in behavioural finance. Clear rules for closing a position, such as a stop-loss and a price target set in advance, help to avoid such decisions.