Unrealized Loss refers to the decline in the value of an investment that has not yet been sold. It occurs when the current market price of a security falls below its original purchase price, but the investor continues to hold the position. This type of loss is “on paper” and only becomes a realized loss when the asset is actually sold at a lower price than it was bought for.

In simple terms, an unrealized loss represents the potential decrease in an investor’s portfolio value. For example, if you purchased shares worth _10,000 and their market value drops to _8,000, the _2,000 difference is an unrealized loss. However, if the price recovers, this paper loss can turn into a gain — emphasizing why long-term investors often avoid making decisions based solely on short-term market fluctuations.

Unrealized losses are a common part of market volatility and do not impact taxable income until the position is sold. Investors and traders use this metric to assess portfolio performance and identify potential risk exposure. Monitoring unrealized gains and losses helps in making informed decisions about when to hold, rebalance, or exit an investment.

From a financial reporting perspective, unrealized losses are recorded differently depending on the type of asset and accounting method used. For instance, they may affect a company’s balance sheet under “mark-to-market” valuation but are not recorded as actual expenses until realized.

Understanding unrealized losses is essential for every investor. It encourages a disciplined approach to investing — focusing on long-term growth, avoiding emotional decisions, and aligning with SEBI’s investor protection guidelines that promote transparency, informed choices, and responsible investment practices.