This table highlights the critical distinctions between realized and unrealized gains, crucial concepts in finance and investing. Understanding these differences helps investors assess their portfolio performance and make informed financial decisions.
Table of Contents
Difference Between Realized Vs. Unrealized Gain
Every investor or trader who has invested in the stock market eventually creates a portfolio, which can be evidently observed to go up and down in value with market behavior and time. Now, both realized and unrealized gains are profit, but the critical difference lies in the exit process.
An investor's gain remains unrealized until they decide to sell their securities and exit the market with a profit. Once the investor sells the securities and withdraws the profit, the gain is considered realized. This distinction highlights the difference between potential profit and actual profit from investments.
Key Takeaways
- In realized vs unrealized gain, the former represents the profit that an investor made by actually selling the securities and exiting the position. In contrast, the latter is just a profit on paper until sold.
- Realized gain is the profit earned by an investor by selling a stock that went up in price.
- Unrealized gain is a scenario in which the investor stays invested in the stock and does not sell or exit the position, which makes the profit only on paper and is exposed to change in value with time and market shift.
- Realized gain is a profit on which the investor has to pay short or long-term capital gain tax, but an unrealized gain is not taxed.
Comparative Table
| Particulars | Realized Gain | Unrealized Gain |
|---|---|---|
| 1. Meaning | Profit that comes after selling the investment. | Profit that is on paper and can change with time and market shift. |
| 2. Variation | Once sold, there is no variation possible for a realized gain. | Unrealized gain can go up and down in value as the investor is still holding them and the money is still invested. |
| 3. Position | Closed market position | Open market position |
| 4. Tax | Realized gains are subject to capital gain taxes both short and long-term. | Unrealized gains are not subject to any tax implications. |
| 5. Impact | Once a gain is realized, it downsizes the portfolio in terms of capital value. | With market price moving up and down it does bring change to the current portfolio value but not as significant as realized gain. |
What Is Realized Gain?
Realized gain is the profit that an investor registered by selling the securities and exiting the stock position from the market and its portfolio. When investors decide to buy a company's stocks, they ultimately build a portfolio that represents all the securities the investor is holding; now, when it increases in value, there can be a positive difference witnessed between invested funds and current value. If the investor sells the securities, they close all the open stock positions and take away the profit. This profit is the realized gain that the investor actually realized and now has deposited in its bank account.
Suppose Rachel is a new investor. She bought 90 shares of a banking stock at the price of $45 each, investing a total of $4050. Now, within four weeks, the banking stock's share price hikes to $72, which makes Rachel's total portfolio value $6480 and determines an on-paper profit of $2430. Rachel decides to sell the banking stock and take away the profit; the moment Rachel sells the banking stock shares and exits the market, she ends up making $4050 to $6480, realizing a gain of $2430. This is a realized gain. The banking stock can decline in price, dropping below the price at which Rachel bought it; in that case, it would have become a loss, and if, in that scenario, Rachel had sold the securities, she would have made a realized loss.
What Is Unrealized Gain?
Unrealized gain is, again, a profit that an investor has gained, but only on paper. When an investor buys a stock and, with time, its price increases and there is a visible increase in portfolio value along with the profit that is currently on paper, that profit is called unrealized gain because the stock position is still open, the investor has not yet sold the securities in fact, the investor is holding the position. In a nutshell, whatever profit the portfolio has gained is only there on paper but not really in the hands of investors or deposited in their bank account.
For instance, let us extend Rachel's example further. In the previous example, she bought 90 shares of a banking stock at the price of $45 each, investing $4050. This $4050 is what makes Rachel's portfolio. Now, replicating the exact scenario, in the next four weeks, the banking stock price increases to $72, making her portfolio value jump to $6480 with an on-paper profit of $2430.
Now, this is the real distinguishing factor. Rachel, at this point, decides to hold the position and not sell it to make an actual profit. The market position remains open, and it makes the unrealized gain exposed to market change and fluctuation in value. The next day, the profit increases to $2700. At the same time, it is equally possible that the price will decline and Rachel's profit will drop to $1800. In any of these scenarios, the gain can go up and down in value but will be accounted as unrealized gain because Rachel still holds the position and stays invested.
In a different situation, if the price drops dramatically and goes below the price at which Rachel purchased it, and if Rachel still holds the position, it will be accounted as an unrealized loss. This brings us to an exciting aspect of unrealized gain, which is also a crucial difference between realized and unrealized gain. Unrealized gain is never taxed, so although it is exposed to change in the market, it helps reduce taxes. In comparison to unrealized gain, a realized gain has tax implications.
Similarities
The following are the similarities between realized and unrealized gain –
- Both realized and unrealized gains represent positive outcomes for an investment portfolio, reflecting overall growth in value.
- Regardless of their status as realized or unrealized, both types of gains originate from an increase in the market price of securities, indicating profit potential.
- Both realized and unrealized gains arise from the appreciation of stock prices in the market, demonstrating the beneficial effects of rising asset values on investment performance.
