A holding period is the duration for which an investor holds onto a particular stock. In other words, it is the time between purchasing and selling a position. Thus, the period of holding is calculated from the day you buy a stock, and it ends on the day you sell the position.
Depending on the investment strategy and market conditions, holding periods can be as short as a few hours or as long as a decade. Equities held for less than a year qualify as short-term holdings, while those held for over a year are long-term holdings. Holding periods help estimate total returns and determine the taxation procedure on capital gains and losses.
Importance of holding period
Discussing holding in the share market is important from the perspective of taxes and returns. The profits generated from the sale of assets are taxed as per the holding period norms. For instance, if investors hold securities for less than a year, any gains from these securities will be taxed under short-term capital gains. Conversely, if the investor holds securities for more than a year, profits from the same will be taxed as long-term capital gains. Similarly, the holding period decides the short-term and long-term loss set-off and carry-forward rules for losses incurred on the sale of such investments.
The holding period in the share market also decides the return on investments, particularly equity investments. Apart from capital appreciation, equity investments also bring dividend income from company profits. Investors can quantify returns from holding a stock for a specific period and compare the same with other investment options with different holding periods. For instance, a 10% return on a stock in a year presents a good yield opportunity over, say, another stock that might offer a 10% return over 6 years.
Moreover, knowing the holding period is also essential since most companies have a minimum holding period requirement before an investor can qualify for dividend payouts. Thus, exiting the position right before meeting this minimum requirement would disqualify you from receiving dividend payouts.
How to calculate the holding period?
Now that we've covered what is a holding period in the share market and why it is important, it's time to move on to the calculation process. The stock holding period starts when the stock is bought and ends on the day it is sold. For instance, you buy shares of company XYZ on 20th July and sell these shares on 20th October. In this case, the holding period for the stock will be three months. As such, any profits made on the stock sales will attract a short-term capital gains tax.
The following formula is used to calculate the return from the said holding period:
Holding Period Return = [Income + (EOPV - IV)] /IV
Here, EOPV = end-of-period value
And, IV = initial value
Let's say an investor purchased shares in a stock at Rs. 60 a year ago and earned Rs. 10 as a dividend over the year. If the shares are currently trading at Rs. 80, the holding period return on them will be:
HPR= [10 + (80-60)]/60
HPR = 50%
Holding period returns are expressed as percentages. This means the end result has to be multiplied by 100. Holding period returns are yardsticks for investors. Estimating these total returns can help them choose between different stock options with different holding durations and maximise returns.
Capital gains
The profit derived from the sales of a capital asset is considered income and is thus subject to taxation. As mentioned earlier, gains from the sales of assets are taxed as per the holding period norms. In other words, short-term holding gains are taxed differently from long-term holding gains.
If the period of holding is less than 12 months, a short-term capital gains tax of 15% is payable on any gains from the sale of the stock. On the other hand, if the stock is held for more than 12 months, a 10% long-term capital gains tax is payable. However, this only applies if the long-term capital gains from the position breach the Rs. 1 lakh threshold.
Conclusion
While there is no tried and tested formula to guarantee profitability in the stock market, the holding period remains essential for investors to gauge their returns and tax liabilities. Understanding what holding means in the share market is necessary for an investor trying to make savvy investment choices and timely play their long and short positions to maximise returns. With a comprehensive returns analysis, traders and investors can compare assets and create a diversified portfolio that hedges risks without compromising profitability.
