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An investment’s fair market value is the price for which it would sell on the open market. A company must record the change in fair market value of certain investments it holds that it classifies as trading securities, and that it classifies as available-for-sale securities. Trading securities are investments that the company expects to resell in the near future. Available-for-sale securities include investments that can’t be classified as trading securities or another investment category. The changes in fair value result in an unrealized gain or loss, which are gains and losses you incur while you hold an investment.
Determine the purchase price and quantity of an investment your company holds that it classifies as either a trading security or an available-for-sale security. For example, assume you purchased 1,000 shares of a stock for $15 per share.
Multiply the purchase price by the quantity to calculate the fair market value at the time of purchase. Continuing with the example from the previous step, multiply 1,000 shares by $15 to get $15,000.
Determine the fair market value of the investment at the end of the accounting period, which you can obtain from the broker or dealer from who you initially purchased the investment. Assume the stock price increased to $17 per share.
Multiply the fair market value at the end of the accounting period by the quantity of the investment to calculate its total fair market value at the end of the period. Multiply 1,000 shares by $17 per share to get $17,000.
Subtract the initial fair market value from the fair value at the end of the period to calculate the change in fair value. A positive number represents an unrealized gain, while a negative number represents an unrealized loss. Subtract $15,000 from $17,000 to get a $2,000 change in fair value, which represents a $2,000 unrealized gain on the investment.
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