Profit and loss are two inseparable characteristics of all financial markets. Anyone who wants to start participating in these markets should first fully grasp the concept of profit and loss, and be familiar with all aspects of them. Maybe, as a newcomer, or even as an expert, you don’t know that profit and loss have two types: realized and unrealized. If so, then stay with us up to the end of this article to figure out what realized and unrealized profit and loss are.
What is realized profit and loss?
In simple terms, the realized profit is the real profit you earn after selling your assets, or closing your positions. It is your profit after a trade is completely finished, and its main characteristic is that you can change it to fiat money. So, if the value of your portfolio increases even by 10 times, you can’t claim that you have gained that profit, unless you sell all the assets in your portfolio and change them to fiat currency. The realized loss also follows the same concept. If the value of your portfolio is halved, you haven’t really experienced that loss until you sell your assets
This is the underlying concept of realized profit and loss. However, there is a formula for each of these concepts that may help you better understand how they actually work in the real world.
The formula for realized profit and loss
Realized profit is calculated as follows:
Realized profit = the price of the asset when selling – the price of the asset when buying
And the formula for realized loss is:
Realized loss = the price of the asset when buying – the price of the asset when selling
An example of realized profit and loss
Imagine you have bought 3 units of Solana and paid $100 for each (you have paid $300 in total). After a few days, the price of each unit of Solana increases to $130. You then sell all your SOL tokens, and your realized profit equals $90. The realized loss is exactly the opposite point. If you had bought the SOL tokens when the price of each unit of SOL was $130, and then sold your tokens when the price was $100, your realized loss would be $90.
What is unrealized profit and loss?
Up to here, everything seemed so simple. Realized profit and loss are the same concepts you have in your mind as profit and loss. Unrealized profit and loss are not so different neither. The only difference is that in unrealized profit, you have made a profit, but you haven’t sold your assets yet to make that profit real. Or, in unrealized loss, you have experienced a loss, but haven’t sold your assets, so the loss is just “on paper”. This is why unrealized profit and loss are also called “paper profit and loss”.
An example of unrealized profit and loss
As a sample, we can refer back to the example of Solana we mentioned earlier. If the price of your SOL tokens increases to $130 per unit, but you don’t sell them for any reasons, your profit is only on the paper, and is unrealized. And if the price of your tokens decreases to $100, but you don’t sell them for any reasons, you haven’t actually experienced that loss, and it is an unrealized loss. The main difference between realized and unrealized profit and loss is that the realized type is determined and won’t change, but the unrealized type is very likely to change in the passage of time.
Although realized and unrealized profit and loss seem so simple, they are significantly important for traders and investors. During a trade or an investment, you may experience numerous profits and losses, but none of them are “realized” till you haven’t clicked on the sell bottom. So, you can’t also call your trade/investment successful or unsuccessful. The concept of realized and unrealized profit and loss stresses the importance of selling at the right time. A successful trader/investor is one who knows when to sell the assets and exit the market. Otherwise, having unrealized profits and losses is so simple.