Definition of Paper Loss

What is a "paper loss"? What is the definition of a "paper loss"?

First off, a "paper loss" can also be called an "unrealized loss".

A "paper loss" occurs when the value of something drops below the price that was paid for it. However, in the case of a "paper loss", the asset hasn't been sold, meaning that the loss has strictly been taken "on paper".

If an asset is sold and a loss is taken, then the "paper loss" turns into a "realized loss".

Let's look at a few examples of a "paper loss":

Example #1 - You decide to buy a condo in Miami, Florida for $300k.

The real estate market starts to tank shortly thereafter. Two years later, and the condo has dropped in value to about $250,000.

You decide that you are going to just hold through the downturn, instead of opting to sell. This would mean that you have suffered a "paper loss" of $50,000 on your investment.

Example #2 - You decide to buy 1,000 shares of MSFT at $25 per share, certain that the stock is about to rebound.

The company reports weaker than expected earnings and trades down to $20 per share.

Instead of choosing to sell, you decide that you are going to ride it out and keep the stock for the long term.

This would mean that you are looking at a "paper loss" on the investment of around $5,000.

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That's a "paper loss".


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