What is UPL in Finance and Trading?
I read some financial reports about currency trading, and I found one term, “forex UPL.” It is not a regular term in trading, but pro traders like abbreviations. So in trading jargon, Forex UPL means Unrealized profit or Unrealized loss (Unrealized P/L).
At the end of a trading day, an investor can count a loss or profit depending on the trade dynamics. Therefore anytime you buy or sell assets, it is important to differentiate between realized profits and paper profits or unrealized profits. These terminologies can be confusing, which is why I have provided this article to help you understand the meaning of UPL. Read on and find out.
What is realized profit in the share market?
It is to understand realization is the amount one obtains after making a sale. If you are having shares in a company, the amount of loss or gain will be referred to as realized gain or loss.
Well, what is a realized profit? Realized profit in the market is defined as the capital gain obtained at the end of the completed transaction. So realized profits are gains that have been converted into cash. The amount of the realized is often deposited in the trader’s trading account, which is normally reset to zero at the beginning of the day to keep track of the day’s trading success. The good thing is that this profit can be withdrawn into a bank account.
This is popularly known as unrealized profit that results from an active trade that has not been exited. Therefore the amount you would get from trade if exited at that particular time is referred to as unrealized profits. Therefore, paper profit is subject to change anytime there are fluctuations in the market price.
For instance, if you own about 500 shares and each share is priced at $0.25, you will expect a dividend that totals up to $ 125.This will be cash in hand, so even if there is a negative fluctuation in the stock price, it will not affect your money. Additionally, if you choose to buy shares at $15 each, and later on you sell them at $ 20, you will have made a $5 profit.
On the other hand, let us have a look at the paper profit. If, in any case, you will price your sale per share at $20 and you bought it at $15, you will still have a profit of $5 per share. Therefore, if you choose not to sell it because you have speculated that the price might go up, you have a profit of $5 per share only on paper because you have not sold them. The price can still go down, which might change the speculated profit.
As long as you still hold them without selling, you suffer the risk of losing all of them, and that is why when taxation is done, you can’t claim it as income because you have not received the money in cash. Therefore, if you choose to hold onto the stocks, you can as week defer the taxable income.
Unrealized P/L – UPL forex
In your trading platform, you might have seen a green or red indicated floating p/l or unrealized P/l. These parameters are equally important when it comes to trading so let’s get into it.
Unrealized loss refers to a scenario when you hold onto the assets after the value has depreciated rather than selling them because you don’t want to realize the loss.
On the other hand, if you choose to let go of the prices after it has risen, the buying price without selling might not realize the profit, hoping that the prices will go higher than the current sale value. However, you face the risk of losing the profit because prices might drop.
Therefore, for both scenarios, if you choose not to sell, the effect of realizing a loss or a profit will not take effect. The unrealized p/l is normally calculated for a specific period. This might be when the assets were acquired compared to the current market value to see when the sales saw a profit or loss.
The decision to sell an unprofitable asset, which will turn an unrealized loss into a realized loss, depends on the investor. This can be done to salvage the overall portfolio. This happens when there are no perceived chances of the prices recovering after a drop. The unrealized P/l is sometimes referred to as floating p/l.
This is because the investment value will continue fluctuating with the current market prices giving an option of realized profit or loss. After all, the trade has not been completed. However, it might turn into a realized profit or realized loss once the trade has been completed.
The Only Real Kind of Profit
It is important to understand that when a trader says that he realized X ticks, it refers to the unrealized profits based on the current assets or investment. Similarly, a profit, in this case, will refer to the realized profit. The difference between realized and unrealized profits might not be that big but realized profit is a real profit.
This is because you will get instant cash, which can be withdrawn from the bank. However, unrealized profits are just virtual because they are subject to change; you can also lose the trade because it is subject to price changes; hence it ceases to be an active trade.
Taxes and Realized Income
When you exit a trade by taking your realized profit, the internal revenue service will consider it a tangible income, and you will owe income taxes because it is no longer a paper profit. Therefore if you are an investor, you will need IRS Form to show the trade loss and gains.
You can offset business expenses if you trade actively to build your trading income. Therefore anytime you realize a potential realizing profit, don’t hesitate because the market can fluctuate. In some cases, some investors might choose to let go of this if they have other sources of income.
However, if you want to be a successful investor, the bottom line is to get to know the market dynamics and be precise with your trading. When an opportunity to makes a profit comes in your way, seize the opportunity. Additionally, identify a qualified CPA to know which IRS considers active traders suitable for business.
Anyway, in Trading Slang and Expressions, traders use various abbreviations. Forex UPL was one of them…