Unrealized Gains - Definition and Trading Example

Definition of Unrealized Gains

Unrealized gains are the profits from trading activities which have not been closed out and cash received.  These are also commonly referred to as paper profits. 

Unrealized Gains Trading Example

For example, let's say a trader purchased 20,000 shares of Motorola at $5 in the mid-90s.  The stock had a number of splits and rallied all the way up to $60 dollars in early 2000.  At this point the trader would have had an unrealized gains in the order of over $1 million dollars, not including the stock splits.  But if this trader would have held the stock until today, he or she would only be able to sell the stock for $5.16.  So, this trader would have missed out on unrealized gains of over $1 million dollars if they utilized a long-term buy and hold strategy.

Unrealized Gains and Emotions

Unrealized gains can bring about a lot of emotions in a trader.  Many traders get attached to their paper profits, and become unable to close out a winning position, because their account is far off their highs.  This is why traders should focus on their trading methodology and not their bank accounts.  They can do one better and build our rules for locking in profits as their winners increase in size.