paper loss

Paper loss refers to a loss which has occurred but has not yet been realized. It is calculated after a comparison with the current market price of a security and the earlier purchase price. The stock’s value has lowered but since the security is still not sold, losses have not been realized. Paper loss is also called unrealized loss.

Plenty of investors make themselves believe that since their loss has not been crystallized, they have actually not suffered any real loss. Nothing can be further from truth.

The assumption that paper losses are not real is a misleading one. This is because of the simple reason that enormous amount of time would be taken for the stock to go back to the break even point. That is also not taking into account the effects of inflation which otherwise makes the “grow back” time even longer. Suppose you possess a stock that fell by 25%, the same amount would first require growing back 34% before getting to the break – even point.

You can prevent big losses by not putting more than 4% of your entire portfolio to a specific stock. After you purchase it, you need to put a trailing 25% to avoid loss on it. Thus total risk becomes very low.