Realized Vs Unrealized Returns
Below is a MRR and PLR article in category Finance -> subcategory Other.
Realized vs. Unrealized Returns
Summary
Traders deal with two types of returns when assessing profits and losses in the markets: realized and unrealized. Realized returns are those from closed positions, whereas unrealized, or "paper" returns, involve open positions. For example, if you buy a stock at $100 and it rises to $110 without closing the trade, you have an unrealized gain of $10. If the trade is closed at that price, it becomes a realized profit.
Article Body
In trading, understanding the distinction between realized and unrealized returns is crucial. Realized returns, or "booked" gains and losses, occur when a position is closed. Conversely, unrealized or "paper" returns pertain to positions that remain open. For instance, buying a stock at $100 and seeing it rise to $110 results in an unrealized gain of $10. Closing the trade at that point turns the gain into a realized profit.
This differentiation may seem minor, but it holds significant implications for trading and money management. A common debate revolves around the reality of paper losses?"they only become real once actualized, influencing trading strategies based on the market.
In cash markets like stocks, the difference between paper and booked returns isn't critical. Market fluctuations don't affect a trader’s ability to make new trades. For example, with a $10,000 account and purchasing 100 shares of XYZ at $50, the remaining $5,000 can still be used for new trades regardless of XYZ’s price movement. The account balance changes only when the shares are sold and the profit or loss is realized.
In contrast, in markets like futures and spot foreign exchange, all profits and losses are realized immediately as they affect available margin. For instance, consider a $10,000 account in futures trading. If the margin requirement for a 10-year note futures contract is $2,500, buying two contracts leaves $5,000 in available margin. If the contract price rises by a point, the trader gains $2,000, increasing the available margin to $7,000. Should the price fall by a point, the margin drops to $3,000.
Understanding realized and unrealized returns is essential for developing effective money management and trading systems. Failing to recognize these differences can lead to errors in position sizing and exposure, potentially turning a promising system into a risky one.
You can find the original non-AI version of this article here: Realized Vs Unrealized Returns.
You can browse and read all the articles for free. If you want to use them and get PLR and MRR rights, you need to buy the pack. Learn more about this pack of over 100 000 MRR and PLR articles.