What it is:
How it works/Example:
Let's say John Doe starts a business. He invests all of his $50,000 savings, and soon the business takes off. Four years later, John wants to get a bank to expand the business. The bank deploys its financial analysts to conduct a valuation of the business. Due to the high growth and the business's profitability, the bank values John's business at $1.5 million.
Nobody writes John a check for $1.5 million. He simply has an that has become worth $1.5 million. He has become a paper millionaire.
Why it matters:
Being a paper millionaire is very exciting and fun to talk about, but it doesn't always cash to buy groceries, pay college tuition or pay the gas bill. Only after the person sells the does he or she truly capture the value of the asset -- and become a "real" millionaire.
Company founders often become paper millionaires when their companies go public. They often own a of in the company (if not all the shares), and the determines the value of those shares. This can mean that an ownership position can suddenly become worth millions overnight. However, we all know that you can't buy groceries with shares of stock. Until they sell their shares, they're merely paper millionaires.