It is important to state the difference between revenues, profits, and gains when talking about this concept. Revenue refers to the amount of money received by the regular business activities of the company, i.e. selling goods or services. Profits are the excess revenues after costs and expenses have been paid for a period. Gains, on the other hand, come from an increase in the value of a given asset. To calculate a gain or loss in the value of an asset, we must identify what is the current market value of the asset and then subtract the acquisition cost of that asset. Gains can be either realized or unrealized. Realized gains take place when the transaction is completed and the asset is sold, the buyer takes ownership and the seller takes the payment, including the gain. Unrealized gains occur when the market value of the asset rises, but the asset hasn’t been sold yet. Thus, it remains in the hands of the current owner. There is a gain but it hasn't been realized yet.
In a nutshell :
- A gain arises if the current price of something currently owed is higher than the original purchase price.
- Investors may talk about gains whenever the market price of an asset exceeds the purchase price they paid, but unrealized gains may come and go many times before an asset is sold.
- Once an asset that has seen a gain in value is sold, an investor is said to have realized the gain—or, put more simply, made a profit.