In the financial world, book profit is a profit which is demonstrated on paper, but not yet actually real. The best way to think about this is in terms of stock value; if someone purchases a stock and the value goes up, he or she has made a book profit. By selling the stock, the investor can turn the paper profit into an actual profit. Conversely, a book loss is a loss listed on paper which has not yet actually occurred; in the stock example, the value of the stock would have decreased after purchase, meaning that the investor would take a loss by selling it.
A business can use a book profit to suggest to investors that it is performing well, but this information should be used carefully. Since the profit has not yet actually occurred, it could vanish with a sudden change in the market. Some people prefer to call a book profit a “paper profit” to remind themselves that the profit has not yet been realized. Likewise, a book loss can suggest that a business is on shaky financial ground, but the business could still pull through.
These unrealized profits can be misleading for investors as well, especially investors who are exploring the stock market. After making a book profit, the market could experience a sudden downturn, leaving the investor right back where he or she started, or with even less money. Learning the art of picking the time to buy and sell stocks is important for investors, to ensure that they protect their investments while also turning a profit.
One common problem that investors have with book profit is that they have trouble selling stocks when their value declines. For example, if a unit of stock is purchased for $100 US, and the value increased to $150, the book profit is $50. If the investor hangs on to the stock and the value drops to $130, a sale would still net a profit, but the investor might be reluctant to sell until the price climbs back up again. This can be dangerous in a volatile market, since investors are afraid to let their stocks go, and they could end up with a net loss as a result.
One advantage to a book profit is that it is not taxable, since no transaction has taken place, and the profit is only on paper. This can be advantageous for some people. For example, when the value of a piece of real estate increases, the land owner will be taxed at the same rate as when the land was purchased, since the increased value is a paper profit. Thus, property taxes can be kept low, as long as the land is not sold; as soon as it sells, the seller is taxed on the profit made and the real estate taxes go up for the new buyer.
