Definition of Paper Millionaire
By Dave Manuel
What is the definition of a "paper millionaire"?
The term "paper millionaire" means exactly as it sounds - someone who is a millionaire, but strictly on paper.
How does this term apply to the stock market?
Well, let's use an example.
Let's take an employee of XYZ, Inc.
XYZ, Inc. has just gone public. This particular employee of XYZ, Inc. was lucky enough to be granted 100k of shares due to his long tenure at the company.
XYZ, Inc. closes its first day of trading at $10.00 even.
This means that the 100k shares are now worth a cool million dollars.
The problem? The employee can't sell the shares immediately, as there is always a restricted period after a company goes public. This means that insiders and company employees can't start dumping their shares for a certain period of time.
This employee is now a millionaire, but simply on paper. He doesn't have a million dollars in his bank account - rather, he simply owns shares that are worth a million dollars.
If the restricted period ends and XYZ is still trading north of $10, then this employee may be able to dump his shares and actually become a legitimate millionaire (not including any applicable taxes, of course).
Many people during the dot-com boom watched their fortunes disappear as the markets declined during their restricted period.
They helplessly watched as millions of dollars of potential wealth melted away, and many were left with nothing when they are finally able to unload their shares.
The dot-com boom made tens of thousands of "paper millionaires" - however, cashing out wasn't nearly as simple.
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