What is the Holding Period and How to Calculate it. Importance of Holding Period

 

If you want to know in detail about the holding period then this article is for you. In this you will know what is the holding period? And how it is calculated and also we will know about its importance in detail. What is its role in the fall and rise of the stock market?

The stock market is a place where many people can trade with different financial securities at the same time from anywhere in the world. Millions of trades take place every second. Some people deposit their shares while others buy it right away.

The first objective of putting money together is to make money manifold at once. When someone buys a share, he buys it with the expectation of an increase in the amount spent. Whereas when we spend in shares, we spend it keeping in mind how much will come back. But an important aspect of market returns is often forgotten by many.

 investment time period. It is useless to take any return without considering the time period of the investment. A 10% return on an investment in a year is a sought-after proposition, but a 10% return in 5 years may not be true. When one talks about the timing of investment, the holding period becomes essential.

What is the Holding Period?

Holding period means time. The holding period is simply the time spent in a particular asset. This is the time between the purchase and sale of a security. In the long term, the holding period is the time between the purchase and sale of an asset, while in the short term, the holding period is the time between when the security is purchased by the seller and when it is returned to the lender. (holding period).

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What is the significance of holding period?

Holding period is mainly required for two things- returns and taxation. The tax levied on certain properties is based on the investment period. If the asset is sold before a certain limit and if you sell the asset at a profit, it attracts short-term capital gains tax.

 On the other hand, assets held for a long period of time attract long-term capital gains tax. Similarly, if you have a loss on your investment, you may be allowed to set off the loss for future gains with certain rules.

The holding period is also used to calculate the return on investment. An acuity investment pays off in a number of ways. The value of the investment made in the beginning increases and at the same time many companies also pay dividends.

When you look at holding period returns, you take into account all income from investments, such as dividends, along with an increase in the value of the investment. Holding period return helps in comparing different investments with different durations.

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How to calculate holding period?

It is common to see stock recommendations with minimum holding periods. All experienced investors take into account the stock holding period while calculating the total return.

 The holding period is the time from the day the stock was bought to the day the stock was sold. For example, Mohan buys shares of XYZ on 10 November and sells it on 21 December. The holding period for the investment was from November 11 to December 21.

Once you have got the holding period, you can also extract the holding period return. To calculate the holding period return, use the formula, [Income + [EOPV – IV)]/IV)], where EOPV is the end of period value and IV is the starting price.

The importance of holding period in calculating returns is clear. Let us look at the effect of holding period on taxation of profit and loss.

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What is Capital Gain?

Capital gain is any gain or gain derived from a 'capital asset'. Profit from sale is treated as 'income' for the purpose of taxation and hence tax has to be paid on the profit. Capital gains can be of two types – short term and long term.

While all capital assets like land, house, property, patent etc., let us look at equity shares only. The holding period for splitting short term and long term capital gains varies according to the holding period.

In case of equity shares, if it is held for less than 12 months then the asset is considered as short term asset. Tax is levied according to profit or loss.

Long term capital gains tax on securities above 10% and above Rs 1 lakh. This means if the holding period of the stock is more than 12 months and you have earned less than Rs 1 lakh on the investment, you will not have to pay any tax.

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 If security transaction tax is applicable, then short term capital gains are taxed at 15%. If security transaction tax is not applicable, then short term capital gain is added to the income and the taxpayer has to pay income tax.

Along with taxation and returns, the holding period assumes importance if the company declares dividends. When a company declares dividend, there is a requirement of minimum holding period. The shareholder can get stock dividend only if he has held the stock for a certain period of time. 

The minimum holding period is checked before dividend is paid. The holding period gives an outlook for stock investments. Without a holding period, it would be difficult to compare the returns of the two assets. The holding period gives a comprehensive view of the returns generated from similar investments.

What did we go today?

Today we learned what is the holding period? And how it is calculated and also we learned about its importance in detail. I hope you enjoy this information and it will boost your knowledge.