Floating Profit or Loss (P&L)
A floating profit or loss is also known as an open trade gain or open trade loss.
What Is a Floating Profit or Loss?
It is the gain or loss that a trader has when they hold one or several open positions. The P&L changes according to those open positions. A floating P&L helps a trader to track their open positions are doing and see when it is time to close them. Closure of open positions blocks any changes and shows the fixed deposit.
For a purchased long investment, an FPL refers to the difference between the current price and the purchase price. For a sold or short investment, it is the difference between the price when sold short and the current price. FPL may stipulate the mutual fund net asset values (NAV), portfolio valuations, and some tax treatments. This dependency is called mark to market (MTM).
When Floating Profit and Loss Occur?
An FP typically happens when the current price of a security exceeds the price that the investor originally paid for the security. In addition, floating or unrealized profits sometimes happen because holding an investment for an extended time period lowers the tax burden of the profit. For example, if an investor holds a stock for longer than one year, their tax rate is reduced to the long term capital gains tax. An FL occurs when an investor holds onto a losing investment, such as a stock that has dropped in value after the position was opened.
Like a floating profit, a loss becomes realized after the position is closed for a loss. There are two reasons why the investor may choose to sell at a loss: either a need for cash at that moment or the prevention of further losses in a security whose price is predicted to go even lower. It is also possible to create a capital loss to offset capital profits. As the market fluctuates, a position with an FP may eventually turn into a position with a FL and vice versa.
Floating Profit and Loss Examples
A trader takes a long trade EUR / USD at 1.00 and the price moves up in their favor to 1.01. The FP is 0.01. Since the EUR / USD price is always moving, it will not stay at that exact level for a long time. If it continues to move up, the trader’s FP grows, and if it moves down, the FP drops until it hits 1.00. If the price moves below 1.00, then the trader will experience a FL.
A floating P&L is also called unrealized, unrecorded, or undecided profit or loss. Unrealized P&L is also called a paper profit or loss because the actual gain or loss cannot be defined until the position is closed. When a trader opens a trade on day 1 and closes the trade on day 5 for $100 profit, this is called a realized profit. A realized profit can be converted to cash and added to your account balance. A realized loss can be converted to cash and deducted from your account balance.
Between days 1 and 5, before the trade is closed, the price of the trade can move so that the gain or loss would be unrealized because you have not closed the trade yet. So it is a theoretical representation of what your cash profit would be if you closed the trade immediately. Many investors calculate the current value of their investment portfolios based on unrealized values.