In Finance, holding period is the period in which investor will keep his investment. Investment may be in stock, debentures or any other assets. Investor can invest his money for short period or long period. So, holding period may also be short period or long period.
When an investor buys an asset few minutes ago and then sells it after some minutes, it will be his short period holding. For example, you have bought the stock of 1000 shares of ABC company on 9:00 A.M. and sold it on 9:25 A.M. So, the period of this 25 minutes will be your short holding period.
Long Holding Period
When an investor buys an asset for 5 or more years, then it will be his long holding period. For example, a person invested in SBI FD for 10 years with the rate of interest of 9%. So, 10 years his long holding period.
Importance of Calculating Holding Period
Today investor is a rational investor. He has so many options and alternatives to invest his money. To calculate the correct holding period will be helpful for him knowing the best return on any investment. For example, an investor invest his money in different quantities shares in 5 companies in different time period and he got profit on its sale.
A Company : $ 10,000
B Company : $ 12000
C Company : $ 14000
D Company : $ 15000
E Company : $ 13000
Now, from first look, we are seeing that we are getting highest earning from D company. But without going to deep, we will be wrong. We have to calculate his each company's investment holding period. When we buy a specific company's share and when we sold them. We also calculate the total investment in each company. Only after this, we can calculate the rate of return (ROI). After above calculation, we find highest return on investment from B company because his holding period and investment is lowest.
We all know that agriculture was the main business in old time. Farmers had to decide what should they grow. On the basis of return of their investment which were calculated with above way, they took same decision. After sometime, this holding period is so important for all calculations relating to finding correct return on investment.
Related : Finance Basics