What Is Holding Period?
Holding period refers to the duration between when a trader or investor buys an asset and when they sell it.
There are two kinds of people in the financial market at every point in time, buyers and sellers. Buyers are people who come to the market to purchase securities, while sellers are people who already own the securities but want to dispose of them. An entity that is a buyer today may become a seller tomorrow or next. The term “holding period” refers to the duration between when a buyer purchases a financial asset and when they sell it. For instance, an investor buys a company’s stock in March 2020 and sells it in March 2021. The holding period is a year.
The holding period calculation begins the day after the security’s acquisition and runs until the day the investor disposes or sells it. Calculating the holding period of an investment is essential as it determines the taxing of capital gains or losses. It can also help determine whether an investment is worth one’s time or not. For instance, Investment A gives an ROI of 15% in 6 months, and Investment B gives 15% in 6 years. Investment A would appeal to most investors because it offers a lower holding period and is still as profitable as Investment B with has a longer hold duration.
Broadly, there are two categories of holding periods:
- Short-term: This is when investors hold a financial asset for less than a year. Typically, it attracts a higher tax on capital gains.
- Long-term: This is when investors hold a financial asset for a year or more. Typically, it attracts a lower tax on capital gains.
In long positions, a holding period refers to the time between the purchase and the sale of an asset. In short positions, a holding period refers to when a trader borrows the security from a lender and when they return it.
Holding Period Example
Samuel purchased a cryptocurrency on 1st January 2012, as his new resolution was to invest more that year. In March, he wanted to sell it to make 35% ROI, but a friend advised him to hold it a little longer since the coin had the potential of growing more. So, Samuel held it till 2nd August 2019 and sold for 1500% ROI. The time between when Samuel bought and sold the coin is seven years and eight months.« Back to Glossary Index