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REALIZED LOSS

wednesday word of the week May 29, 2019

Definition

A realized loss is the loss that is recognized when assets are sold for a price lower than the original purchase price.

Why It's Important
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Losses suck!  Ok, that wasn't politically correct but they really do.  No one wants to lose money in the stock market but sometimes you do.  It is all part of the risk that you are taking when you invest money.  When you buy something (let's say a stock for ease of explanation), you are setting up your cost basis or book value.  If I bought 1 share at $2.00, $2.00 is my cost basis.  In a month, that share is now worth only $1.00. At that point, without doing anything with it, I have an unrealized loss of -50%.  I decide I don't want that stock in my portfolio anymore so I sell it.  Now, I have a REALIZED LOSS of $1.00.
Believe it or not, this is not all bad news!  Yes, I am sad that I lost a dollar BUT now I can write off that loss on my taxes to offset any gains in other investments.  This, my friends, is called tax loss harvesting but that's another vocabulary word for another week.  

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