How does a call option work and why would someone buy one?
What is a holding period?
A holding period is the duration of time between the acquisition of an asset and its sale. It is the length of time during which a particular asset is “held” by an individual investor or entity. Holding periods determine how to tax an asset’s capital gain or loss.
There are two broad categories of holding periods: short-term and long-term periods. Typically, long-term investments have a lower tax rate than short-term investments. For an asset to gain the advantage of lower tax rates, it must be held for at least one year and one day. An asset with a short-term holding period is usually in the investor’s possession for one year or less.
Counting the length of a holding period begins on the day after the purchase of the asset until the day of its sale. For instance, the holding period of an asset bought on Feb. 3 begins on Feb. 4. An asset bought on July 1 and sold on Sept. 30 would have a short-term holding period of three months. A majority of companies with strong cash positions prefer short-term capital investments such as bonds and stocks, as they earn higher interest than traditional savings accounts.
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Holding period example
Gabby buys 200 shares of stock on Jan. 11, 2017. Her holding period begins the following day, Jan. 12, 2017. She sells her stock on Dec. 12, 2017, giving her a holding period of 11 months. Because her holding period is less than a year, she will realize a short-term capital gain or loss, rather than a long-term capital gain or loss.
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