Unrealized profit and loss takes place when a trader has his position open in a security that has either depreciated or appreciated in value. This is also termed paper profit or loss because the actual gains are not realized until the security is sold.
In layman’s terms, unrealized profit and losses occur when an investment position is held for a long time but cannot be realized unless the position is eventually sold. The calculation of such a profit or loss helps to determine the present value of the investments held. In case the value is greater than the cost price, it is called an unrealized profit. However, if the present value of the asset is less than the price for which it was purchased, it is called an unrealized loss.
Unrealized profits and losses are tracked in the mark-to-market accounting process. Trading requires utmost attention, which is true especially for day traders who often trade a lot during the opening hours of the market. Traders focus majorly on their realized profits and loss as they represent the actual profits and losses that can be used to pay taxes, while the unrealized profit and losses do not impact the account balances or the tax routine.