A disposition is the implementation process of the investor's assets by selling them on the securities market. A stock exchange is the most popular platform for this. The term disposition may also refer to donations to charities and other funds, the sale of any financial asset either land, buildings or any other type of real estate. The disposition central meaning is that the investor refuses to own his asset.
What is a Disposition
A "disposition of shares" is the most frequent mention of a disposition. Assume that business of a certain company is getting worse lately. There is a specific shareholder who has been the investor of this company for a long time.
If the exit from the investment is considered by the investor as the most optimal solution in this situation, this will be followed by a disposition of the shares. With a high degree of probability, the sale of shares will be carried out with the help of a broker on the open market.
As a result, it has been determined to dispose of these shares. If any profit is recorded as a result of this sale, then this is regarded as a capital gain. According to the established requirements of the Internal Revenue Service (IRS), the former shareholder must pay capital gains tax on the profit from the sale.
Transfer and assignment of certain assets lawfully are also considered as a disposition. For example, some person can assign his assets to members of his family or to a charitable foundation. In most cases, the purpose of this transfer may be the disposer’s release from paying taxes or other obligations. If the stock was worth $1,000 at the time of purchase by the investor, and then it rose in its price to $5,000, in order to avoid paying capital gains tax the investor can donate it to a charity. Further, these $5,000 can be declared by the investor as a tax deduction.
Disposition in business
A disposition of shares in business is a common thing. The process called divestiture is carried out through such procedures as a spinoff, split-up, and split-off.
The Securities and Exchange Commission (SEC) has developed special instructions regarding a disposition. The SEC’s requirements are to fill out a specific form depending on the type of the disposition.
For significant transactions that are probable or have already been completed, but have not yet been reflected in the company's audited annual financial statements, pro forma financial statements must be presented.
An income test and an investment test are two tools through which there is an understanding of what is a significant transaction. If a share in the income before taxes, extraordinary items and cumulative effects of changes in accounting standards equals the level of 10 per cent or more of such income at the end of the last financial year, it will be demonstrated in the income test. In some cases, the minimum level can be boosted to 20%.
The second test shows the value of the disposed investment compared to total assets. The quantity is considered significant if it exceeds 10% of total assets at the end of the last financial year.
The Disposition effect
The "disposition effect" demonstrates the behavior of a particular investor, who closes winning positions in the portfolio before the required time and without waiting for their full potential. At the same time, such an investor holds unprofitable positions in his portfolio, counting on the reversal of the asset and making a profit.
Referring to the concept of loss aversion, behavioral economics can analyze a person's propensity to sell a winning position versus a losing position. An investor can avoid the disposition effect by taking a comprehensive approach to making a decision.