The stock market is volatile for its trade practices, where millions of trades take place every minute. Many investors sell the stocks while others buy them, and the process goes on, but one of the important factors that investors focus and speak about is the holding period.
The holding period is the time for which the investors hold the investment or, in other words, the time between the purchase and sale of securities. For example, Person A invests Rs.100000 for the interest of 10% for a 5-year tenure; the holding period is five years. It is the time from the investment till the process completes.
One of the thoughtful doubts would be why the holding period holds such importance. When one invests in the stock market or any other investment, the holding period determines if the investor is in profit or losses. It is not the interest rate or returns alone; if the holding period is high, a 10% return would not be desirable on a huge amount because the yield is not high. For example, Security returns 10% interest on the principal investment after one year; then, it is profitable. Still, if the same investment returns 10% of the principal amount's interest after five years, one might not want to invest in it. The reason is simple, the period or the time between the purchase and sale is more, and the returns are less.
In long positions, a holding period is a time between the purchase and the sale of an asset. It is beneficial to hold the assets or investments in long positions as the investor holds the right to sell the asset or investment at a specified price and timeframe. It is a bullish nature as the investor waits for the prices to soar, and the investor could earn more profit. However, it is risky to hold long positions on assets or investments as they may also incur losses when the prices fall, and the sale is made.
Short positions are the time between the security is bought by the seller, and it is delivered back to the lender to close the position. In this investment, the assets are sold by the investor with the plans to buy later.
The holding period is important for a few reasons, and the two major reasons are taxation and returns. If the holding period is for the short-term or sells the assets before the threshold period and earns profits, it is taxable as a short-term capital gain. Similarly, if the asset is maintained for long-term capital gains, the taxation is comparatively less and only if the profit is above Rs. 1 Lakh. There is no tax if the profit is below Rs. 1 Lakh.
Another importance of the holding period is how much the investor receives as a return. When the investment is in the holding period for a longer time, the investment grows, and simultaneously, many companies also pay a dividend. The holding period helps compare various investments based on the duration and the returns that the investor yields in this process. If the holding period is long and the return is short, the investment might be a bad choice as other investment products that yield higher returns in a shorter holding period might be missed.
The holding period is important to calculate capital gains as taxes are differently calculated on long-term holdings than short-term holdings. Capital gains are the profit that is gained from the sale of capital assets. When the asset is sold, the profit earned is considered as the income, and as per the taxation, the profit is liable to tax.
There are several capital assets such as building, land, house property, and more, but we shall consider equity shares for understanding the capital gains. The holding period of equity shares can be both short term position and long term position; when the asset is in a holding period for less than 12 months, it is considered as the short-term holding asset, and if the asset is in holding period for more than 12 months, it is considered as a long-term holding asset. Taxes are both on short-term and long-term capital assets, and they are taxed differently.
For instance, the long-term capital asset that earns a profit of less than 1 Lakh is not taxable provided the holding period is above one year. If the profit earned is above 1 Lakh, it is taxed at 10% per taxation year. Does that mean short-term capital assets are not taxable? No, short-term capital assets are taxed at 15% on securities transactions such as buying or selling the assets.
Final Words
The stock market is a very dynamic place where the value keeps changing, and the only way to win is a good analysis. The holding period plays an important role in any type of trade or investment which is expected to give returns; it is the time between the purchase and the sale of the investment product. There are long positions and short positions that signify how the holding period changes, how the profits are taxed and how much is expected to return.
There are several reasons why holding periods are important, but the two most important reasons are taxes and returns.
Short positions are the time between the security is bought by the seller, and it is delivered back to the lender to close the position.
In long positions, a holding period is a time between the purchase and the sale of an asset. It is beneficial to hold the assets or investments in long positions as the investor holds the right to sell the asset or investment at a specified price and timeframe.
Capital gains are the profit that is gained from the sale of capital assets.
If the asset is maintained for long-term capital gains, the taxation is comparatively less and only if the profit is above Rs. 1 Lakh. There is no tax if the profit is below Rs. 1 Lakh.