Today we are going to talk about something that often comes up in trading discussions-- we are going to talk about unrealized gains and losses.
As a new trader, you must have noticed a section in your trading account titled 'Unrealized Gains/Losses'. It is usually a positive or negative value, depending on whether you have unrealized gains or losses. Let's try to understand what those are.
Unrealized gains basically are the potential gain an asset will bring to you, if you sell it at that given point of time. This is of course determined when an asset is trading at a higher price than its price of purchase. Likewise, an unrealized loss is the potential loss you'd incur if you sold your asset at that given point. Because it is then trading at a lower price than you purchased it at.
These unrealized gains and losses are only present while you are holding the corresponding assets. That is, say, holding a share in your account and have not sold it just yet. Because once the transaction is done, and your gains and losses reflect in your account, they become what we call "realized".
For example, imagine you purchase a share of ABC Telecom at Rupees 1000 per share. This was a week ago. Today, a share of ABC Telecom is trading at Rupees 1300 a share. This increases the value of the share you're holding by exactly 300 rupees. Say this is the only share you hold. Your total unrealized gains would be 300 rupees at this point of time.
In your trading account, the positive values of unrealized gains will be displayed in green.
But what if the shares traded for say, 800 rupees? In that case, you would be holding unrealized losses of 1000-800 equals 200 rupees.
The negative value of your unrealized losses will appear in red in your account.
So you see, as long as you are holding these shares, you are holding these unrealized gains and losses. That's depending on the current value of your assets. The cumulative unrealized loss or gain can be determined by taking into account the potential loss or gain from each of your shares. So it is no wonder that this value changes everyday, and especially between the end of a trading session and the start of another. Because, as we know, the price of an asset can change anytime and often it changes multiple times a day.
But you might have another question-- if this money is 'unrealized', what does it have to do with you?
Well, just because the money has not been credited to you, does not mean it cannot work for you. There are a couple of things to keep in mind.
First of all, in India according to the Income Tax Act of 1961, there are no tax implications of holding unrealized gains or losses. Yes, zero.
The act deems any earnings made from the sale of stocks can be taxed as capital gains. But unrealized gains are simply potential earnings, not actual gains. There is no real sale or subsequent transfer taking place.
Hence, they cannot be taxed until you actually sell the shares and make the gain. Which is why investors hold on to their high performing assets in order to lighten their capital tax burden. Instead of immediately selling them, they use a staggered-sell approach where they "offload" their shares on smaller quantities.
Which means that as long as you haven't sold your hypothetical ABC Telecom shares, you cannot be taxed on the value they have gained.
Similarly any losses from such transactions are deemed capital losses. These capital losses can be used to offset a person's total capital gains for the financial year. Or be carried forward to the next one.
Monitoring your realized gains and losses is very important in investing. But monitoring the unrealized ones is equally important. If a certain share has been underperforming for a long time and displaying growing unrealized losses, you might be inclined to sell it as soon as it shows a price turnover and displays unrealized gains for you. Of course these calculations must be done by keeping technical indicators like candlestick chart patterns and overall price trends in mind.
Apart from capping losses, keeping track of the unrealized potential of your holdings helps you keep track of your potential wealth and the value of your current assets.
It is important to open Demat and Trading accounts with trusted financial partners that keep updating crucial information about your own assets.
Visit www.angelone.in to conveniently open a Demat Account and gain access to the vast knowledge of everything you need to know about investing your money.
That's all for today.
As usual, Happy Investing!