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Holding period is an investing term it pays to understand. Bankrate explains it.
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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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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