What Is a Loss on Paper?

What is a loss on paper?

A loss on paper reflects the decline in the market price of an asset or equity that has not actually been sold. Because the asset or equity is still owned and has not been liquidated for cash, no actual loss of value has actually been incurred by the owner. A paper loss merely represents the negative difference between the current value of a holding and its initial purchase price.

How to calculate paper losses and profits

Calculating a loss on paper is done by subtracting the purchase price of an asset or equity holding from its current market price. If the current value of the holding is less than the initial purchase price, you will have a negative value. This figure will only be your loss on paper because the asset or equity has not actually been sold.

Calculating paper profits is also done by subtracting the purchase price of the equity or asset from its current price. If the holding's current valuation exceeds its initial purchase price, you will have a positive value. This figure represents the paper profit on the investment -- the amount you would gain if the holding were sold for cash.

Why are paper losses and profits important?

Keeping track of losses and profits on paper will give you an idea of how your investments are performing. For example, the paper value of a stock represents the current price it can be sold for on the market -- but it's not the deciding factor in whether your investment ultimately winds up being a success or failure.

The market price of an asset or equity position can change substantially over time, and a profit or loss doesn't become real until the holding is sold for cash. Accordingly, paper losses and profits merely present snapshots of how investments are performing at a given point in time. These snapshots can be used to shape and inform buying and selling decisions, as well as other financial moves, but returns on investments only become real when the positions are liquidated.

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