Reviewed by Gotrade Internal Analyst
When you invest in a stock that goes up in value, you might feel like you have already made money. But there is an important distinction every investor needs to understand: the difference between a profit that exists on paper and one that is actually yours.
That distinction is the difference between an unrealized gain and a realized profit.
What Is Unrealized Profit?
An unrealized profit, also called a paper gain, is the increase in value of an asset you still own but have not yet sold.
The gain exists on paper because it is reflected in the current market price of your investment. But until you sell, that profit has not been converted into actual cash. It can grow, shrink, or disappear entirely depending on how the market moves.
For example:
- You buy 10 shares of a stock at $40 per share, investing $400 in total.
- The stock rises to $60 per share. Your position is now worth $600.
- You have an unrealized gain of $200.
That $200 is real in the sense that your portfolio value has increased. But it is not locked in. If the stock falls back to $40 before you sell, the gain disappears completely.
Unrealized gains are useful for tracking portfolio performance, but they should not be confused with money you have secured.
What Is Realized Profit?
A realized profit is the gain you lock in when you sell an asset for more than you paid for it. Once you sell, the profit becomes real and is credited to your account as cash.
Using the same example:
- You bought 10 shares at $40. Total cost: $400.
- The stock rises to $60 and you sell all 10 shares. Total proceeds: $600.
- Your realized profit is $200.
That $200 is now yours regardless of what the stock does after you sell. The realized profit meaning is straightforward: it is the gain that has been confirmed through an actual transaction.
Realized profits can also apply to partial sales. If you sell only 5 of your 10 shares at $60, you realize a profit on those 5 shares while the remaining 5 continue to hold an unrealized gain.
Unrealized Gain vs Realized Profit
| Unrealized Gain | Realized Profit | |
|---|---|---|
| Definition | Gain on an asset still held | Gain locked in after selling |
| Status | Paper profit only | Confirmed and in cash |
| Tax implications | Not taxable yet | Taxable in most jurisdictions |
| Risk | Can shrink or disappear | Secured, unaffected by future price |
Why Unrealized Gains Can Disappear
Many investors make the mistake of treating unrealized gains as though they are already secured. This can lead to holding positions too long and watching paper profits evaporate.
Market reversals
Markets do not move in straight lines. A stock that has doubled in price can give back all of its gains during a correction, a sector rotation, or a broader market downturn. Without a plan to protect gains, large unrealized profits can disappear quickly.
Company-specific events
Earnings misses, regulatory issues, leadership changes, or unexpected bad news can cause a stock to drop sharply in a short period. An unrealized gain built over months can be wiped out in a single trading session.
Holding too long out of greed
Some investors hold positions long past a logical exit point because they are hoping for even more upside. This is sometimes called letting a winner turn into a loser. A structured approach to profit taking helps prevent this pattern.
Overconfidence in paper wealth
Seeing a large unrealized gain in your portfolio can create a false sense of financial security. Until those gains are realized, they are subject to market risk. Treating paper profits as cash before you have sold is a common and costly mistake.
Managing Open Profits
Having a plan for managing unrealized gains is just as important as knowing when to enter a trade. Here are practical ways to protect and convert open profits into realized ones.
Set profit targets in advance
Before entering a position, define the price level or percentage gain at which you plan to take profits. Having a target removes the temptation to second-guess the decision when the price actually gets there.
Use trailing stops
A trailing stop order automatically moves upward as the price rises and triggers a sale if the price reverses by a set amount. This allows you to stay invested during a continued move while protecting a large portion of your unrealized gain if the trend reverses.
Scale out gradually
Rather than trying to time a single perfect exit, consider selling portions of your position at different price levels. This converts some unrealized gains into realized profits while keeping some exposure to further upside.
Review positions regularly
Check your open positions on a consistent schedule and ask whether the original reason for holding still applies. If the investment thesis has changed or the position has grown far beyond your target allocation, taking at least partial profits is worth considering.
Conclusion
An unrealized gain exists only on paper and can disappear before you act. A realized profit is secured through a sale and belongs to you regardless of what the market does next.
Understanding the realized profit meaning and the difference between these two states is fundamental to managing a portfolio well. Paper gains feel real, but they carry risk until they are locked in. Building a structured approach to when and how you take profits is one of the most valuable habits an investor can develop.
FAQ
What is an unrealized gain?
An unrealized gain is the increase in value of an asset you still hold but have not yet sold. It exists on paper and can increase, decrease, or disappear depending on market movement.
What is realized profit meaning?
Realized profit is the gain confirmed when you sell an asset for more than you paid. Once realized, the profit is yours in cash and is unaffected by future price changes.
How can I protect unrealized gains?
Common approaches include setting profit targets in advance, using trailing stop orders, scaling out of positions gradually, and reviewing open positions on a regular schedule.
References
- Investopedia, Realized vs Unrealized Gain: Understanding and Differentiating, 2026.
