What is a book profit ?

The term “book profit” is used in finance, which refers to a profit that has not happened yet, but is demonstrated on paper. In stocks, the term book profit is used when an investor sells his stock and turns the “book profit” into a real profit. The term book loss is also used in finance, but to determine potential losses.

Businesses often use book profit to attract potential investors that their business is performing well. However, book profit should be carefully used since the actual profit has not happened yet, a sudden change in the market may result in a loss, which would eventually lose the investors’ trust. In the same sense, a book loss could suggest that a business is experiencing an unstable financial phase, but may eventually pull through.

For investors experimenting on the stock market, using these unrealized profits could be misleading. Since the stock market can be very unstable, the investor may experience a huge financial loss if ever the market experiences an unexpected downturn.

While using book profit has its disadvantages, this kind of profit is not taxable because no transaction has taken place. A good use of book profit is on real estate, wherein a landowner pays low property taxes as long as he doesn’t sell the land because even if the value of his real estate has increased, this increase is a paper profit, so he would be taxed at the same amount when he purchased the land.

A problem with book profit investors usually experience is the difficulty of selling stocks after their values decline. If an investor purchased $500 and the value increased to $700, the book profit would be $200. If this same investor hands on to the stock and then its value drops to $250, he or she may become reluctant in selling the stock until the price increases again. Unfortunately, this practice can result to a net loss if the investor decides not to let his stocks go, especially while he can still sell the stocks to net a profit.

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